OLD MUTUAL LIFE ASSURANCE COMPANY (SOUTH AFRICA) LTD

Transcription

1 OLD MUTUAL LIFE ASSURANCE COMPANY (SOUTH AFRICA) LTD ANNUAL FINANCIAL STATEMENTS 31 DECEMBER

2 Contacts Public officer Auditors J Baepi KPMG Inc. Chartered Accountants (SA) Registered Auditors 1 Mediterranean Street Foreshore Cape Town 8001 South Africa Postal address PO Box 66 Cape Town 8000 South Africa Registered office Company secretary Mutualpark Jan Smuts Drive Pinelands 7405 South Africa E M Kirsten Company registration number 1999/004643/06 Preparation supervised by K Murray CA Finance Director These financial statements have been audited in compliance with the applicable requirements of the Companies Act. 1

3 Index The reports and statements set out below comprise the company's annual financial statements: Index Page Statement of directors' responsibilities 3 Certificate by the Company Secretary 3 Directors' report 4 Statutory actuary's report 7 Audit, Risk and Compliance Committee report 8 Independent auditor's report 9 Income statement 10 Statement of comprehensive income 11 Statement of financial position 12 Statement of changes in equity 13 Statement of cash flows 14 Accounting policies Employment equity report 91 The company's consolidated financial statements are contained in a separate document. 2

4 Statement of directors' responsibilities Directors responsibility statement The directors are responsible for the preparation and fair presentation of the annual financial statements of Old Mutual Life Assurance Company (South Africa) Ltd, comprising the statement of financial position at 31 December and the income statement, statements of comprehensive income, changes in equity and cash flows for the year then ended, and the notes to the financial statements which include a summary of significant accounting policies and other explanatory notes, in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa and the directors report. The directors are also responsible for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and for maintaining adequate accounting records and an effective system of risk management. The directors have made an assessment of the ability of the company to continue as a going concern and have no reason to believe that the business will not be a going concern in the year ahead. The auditor is responsible for reporting on whether the financial statements are fairly presented in accordance with the applicable financial reporting framework. Approval of annual financial statements The annual financial statements of Old Mutual Life Assurance Company (South Africa) Limited, as identified in the first paragraph, were approved by the board of directors on 19 February 2015 and signed by: P G de Beyer Chairman B M Rapiya Chief Executive Officer Certificate by the Company Secretary I declare that, to the best of my knowledge, the company has lodged all such returns and notices as are required of it in terms section 88(2)(e) of the Companies Act of South Africa 71 of 2008, for the year ended 31 December and that all such returns are true, correct and up to date. E M Kirsten Company Secretary 19 February

5 Directors' report The directors of Old Mutual Life Assurance Company (South Africa) Ltd have pleasure in submitting their report on the company's annual financial statements for the year ended 31 December. 1. Review of activities The principal activity of the company is the transaction of all classes of life assurance, savings and retirement funding business. The company underwrites life insurance risks associated with death and disability. It also issues a diversified portfolio of investment contracts to provide its customers with asset management solutions for their savings and retirement needs. The operating results and financial position of the company are set out in the income statement, statement of comprehensive income, statement of financial position, statement of changes in equity, statement of cash flows and accompanying notes. Profit before tax was R million (: R million), and R million (: R million) after tax. 2. Consolidated annual financial statements In terms of International Financial Reporting Standards ("IFRS"), the company is required to produce consolidated financial statements as its subordinated debt instrument is traded in a public market. Consolidated financial statements prepared and presented in accordance with IFRS are expected to be issued in April In these company-only financial statements the company's investments in its subsidiaries, joint ventures and associate companies are accounted for as financial assets at fair value through profit or loss and dividends are recognised when receivable. Details of the company's interest in its principal subsidiaries, joint ventures and associates are set out in note Holding company The company's holding company is Old Mutual Emerging Markets Ltd incorporated in South Africa. 4. Ultimate holding company The company's ultimate holding company is Old Mutual plc incorporated in the United Kingdom and listed on the London, Johannesburg, Malawi, Namibia and Zimbabwe stock exchanges. 5. Share capital There were no changes in the authorised or issued ordinary or preference share capital of the company. 6. Dividends Ordinary shares Dividends on ordinary shares amounting to R million (: R million) were declared during the year. The total includes dividends in specie of R million. Preference shares Dividends on preference shares amounting to R 693 million (: R million) were declared during the year. 7. Public interest score The company's public interest score, as determined in accordance with the relevant provisions of the Companies Act, 71 of 2008, is

6 Directors' report 8. Directors The directors of the company during the year were as follows: Name Nationality Changes P G de Beyer South African N T Moholi South African Appointed 17 February C W N Molope South African R T Mupita South African K Murray British B M Rapiya South African P G M Truyens Dutch G S van Niekerk South African Resigned 17 February The directors currently holding office are: Executive directors R T Mupita K Murray f B M Rapiya (Chief Executive Officer) Independent directors P G de Beyer ca C W N Molope ar P G M Truyens ar, ca N T Moholi ar, ca* ar Member of the Audit, Risk and Compliance Committee ca Member of the Customer Affairs Committee f Member of the Financial Assistance Committee In terms of the memorandum of incorporation, Mr P G de Beyer, Ms C W N Molope and Mr R T Mupita are due to retire at the annual general meeting. Ms N T Moholi, having been appointed during the year, is also due to retire at the annual general meeting. All remaining directors have indicated that they would seek re-election at the annual general meeting, and all being eligible, and having been recommended for re-election by the board of directors, offer themselves for re-election. 9. Company secretary Ms E M Kirsten is the company secretary. Registered office Postal address Mutualpark Jan Smuts Drive Pinelands 7405 South Africa PO Box 66 Cape Town Auditors KPMG Inc. will continue in office in accordance with section 90 of the Companies Act. 5

7 Directors' report 11. Events after the end of financial year On 12 January 2015 the company agreed to dispose of the remaining portion of the Menlyn Shopping Centre in South Africa for R3 200 million, subsequent to the completion of agreed upon improvements on the centre. Refer to note 13 for more information. On 23 January 2015 the company purchased a 23.3% stake in UAP Holdings Ltd, an East and Central African financial services company, for a total consideration of R1 139 million (KES 8.88 billion). On 26 January Old Mutual Holdings Ltd, a fellow subsidiary based in Kenya, confirmed that it will be acquiring an additional 37.3% of UAP's shareholding, subject to regulatory approval. Following the successful completion of a bond auction, which took place on 16 March 2015, the company has issued a mixture of floating rate and fixed instruments with several maturities through its existing local South African programme. Accordingly, the JSE Limited has granted a listing to the company on the South African Interest Rate Market with effect from 19 March 2015 under its Unsecured Subordinated Callable Note Programme dated 4 September. The total nominal value of instruments issued was R2 061 million. 12. Going concern The Board has satisfied itself that the company has adequate resources to continue in operation for the foreseeable future. The company's financial statements have accordingly been prepared on a going concern basis. 13. Corporate citizenship and non-financial reporting The Old Mutual Group publishes a separate responsible business report which covers operational activities of its business with respect to its material sustainability issues. 6

8 Statutory actuary's report I have conducted an actuarial review of the company as at 31 December, according to applicable guidelines issued by the Actuarial Society of South Africa. Contracts classified as insurance and investment contracts with discretionary participation features have been valued using the Financial Soundness Valuation (FSV) method. Contracts classified as investment contracts (without discretionary participation in profit) have been valued at fair value as per IFRS 9, Financial Instruments. Policyholders reasonable benefit expectations have been taken into account in valuing policy liabilities. Further notes to this report, including a description of the valuation basis, are provided in notes 41 and 44 to the annual financial statements. Sample derivative contract prices derived from the calculation of market-consistent investment guarantee reserves are provided in note 40. Actuarial balance sheet Published Statutory Published Statutory Total value of assets Actuarial value of policy liabilities ( ) ( ) ( ) ( ) Unsecured subordinated callable notes (3 996) (3 996) (3 000) (3 000) Provisions and other liabilities (40 360) (40 289) (40 928) (40 834) ( ) ( ) ( ) ( ) Excess of assets over liabilities Less: Inadmissible for statutory solvency purposes (495) (475) Less: Limits on group undertakings (7 601) (1 012) Add: Unsecured subordinated callable notes Excess assets (statutory basis) Statutory capital adequacy requirement (CAR) Ratio of excess assets to CAR Notes: 1 Certain of the figures for inadmissible assets and limits in respect of group undertakings and the resulting calculations are estimates. 2 A reconciliation of the movement in excess of assets over liabilities on the published basis is provided in note The composition of the assets backing the CAR is 12.5% in local equities and 87.5% in local cash (: 12.5% local equities and 87.5% local cash). Certification of statutory financial position I hereby certify that: the valuation on the statutory basis of the company as at 31 December, the results of which are summarised above, has been conducted in accordance with, and this statutory actuary's report has been produced in accordance with, applicable Actuarial Society of South Africa professional guidance notes and Board Notice 14 of 2010; the company was financially sound on the statutory basis as at the valuation date, and in my opinion is likely to remain financially sound on the statutory basis for the foreseeable future; and the company also had sufficient non-linked assets to more than cover non-linked liabilities and capital adequacy requirements after allowing for the asset spreading requirements as prescribed by the Long Term Insurance Act. G W Voss Statutory Actuary BSc, FIA, FASSA Cape Town 19 February

9 Audit, Risk and Compliance Committee report The Audit, Risk and Compliance Committee is a committee of the board of directors, and serves in an advisory capacity to the Board in discharging its duties relating to the safeguarding of assets, the operation of adequate systems, risk management and internal controls, the review of financial information and the preparation of the annual financial statements. This includes satisfying the Board that adequate internal, operating and financial controls are in place. Terms of reference The Audit, Risk and Compliance Committee has adopted formal terms of reference that have been updated and approved by the board of directors, and has executed its duties during the past financial year in compliance with these terms of reference. Composition and meeting process The current members are Ms C W N Molope (Chairman), Mr P G M Truyens and Ms N T Moholi. The committee comprises exclusively independent directors, and met five times during the year with senior management, including the chief executive officer, the statutory actuary, the finance director, the group audit director, the chief risk officer and certain other executive management. Representatives from Old Mutual plc also sometimes attend. The external and internal auditors attend these meetings and have unrestricted access to the committee and to its chairman. Ad hoc meetings are held as required. Statutory duties In execution of its statutory duties, as required in terms of the Companies Act and the Insurance Laws Amendment Act, during the past financial year the Audit, Risk and Compliance Committee has: Ensured the appointment as external auditor of the company of a registered auditor who, in the opinion of the Audit, Risk and Compliance Committee, was independent of the company. Determined the fees to be paid to the external auditor and such auditor s terms of engagement. Ensured that the appointment of the external auditor complies with the Companies Act and any other legislation relating to the appointment of such auditors. Determined the nature and extent of any non-audit services which the auditor may provide to the company or such services that the auditor may not provide to the company or related company. Pre-approved any proposed contract with the auditor for the provision of non-audit services to the company. Considered the independence of the external auditors and has concluded that the external auditor has been independent of the company throughout the year taking into account all other non-audit services performed and circumstances known to the committee. Received and dealt appropriately with any complaints relating to the accounting practices and internal audit of the company, the content or auditing of its annual financial statements, the internal financial controls of the company, or to any related matter. Made submissions to the Board on any matter concerning the company s accounting policies, financial control, records and reporting. Legal requirements The Audit, Risk and Compliance Committee has complied with all applicable legal, regulatory and other responsibilities for the period under review. Annual financial statements Following our review of the annual financial statements for the year ended 31 December, we are of the opinion that, in all material respects, they comply with the relevant provisions of IFRS and the Companies Act 71 of 2008 and that they fairly present the financial position at 31 December of the company and the results of operations and cash flows for the year then ended. C W N Molope Chairman of the Audit, Risk and Compliance Committee 19 February

10 Independant auditor's report To the shareholders of Old Mutual Life Assurance Company (South Africa) Limited We have audited the financial statements of Old Mutual Life Assurance Company (South Africa) Ltd, which comprise the statement of financial position at 31 December, and the income statement and the statements of comprehensive income, changes in equity and cash flows for the year then ended, and the notes to the financial statements which include a summary of significant accounting policies and other explanatory notes, as set out on pages 10 to 88. Directors' Responsibility for the Financial Statements The company s directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, these financial statements present fairly, in all material respects, the financial position of Old Mutual Life Assurance Company (South Africa) Ltd at 31 December, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa. Other reports required by the Companies Act As part of our audit of the financial statements for the year ended 31 December, we have read the Directors' Report, the Audit, Risk and Compliance Committee's Report and the Company Secretary's Certificate for the purpose of identifying whether there are material inconsistencies between these reports and the audited financial statements. These reports are the responsibility of the respective preparers. Based on reading these reports we have not identified material inconsistencies between these reports and the audited financial statements. However, we have not audited these reports and accordingly do not express an opinion on these reports. KPMG Inc. Registered Auditor Per: G Dixon Chartered Accountant (SA) Registered Auditor Director 30 March Mediterranean Street Foreshore Cape Town

11 Income statement Notes Revenue Gross earned premiums Outward reinsurance premiums 16 (998) (900) Net earned premiums Investment income (net of investment losses) Fee and commission income Other income Total revenue Expenses Claims and benefits (54 622) (61 280) Reinsurance recoveries Net claims incurred (including change in insurance contract provisions) (54 151) (60 228) Change in investment contract liabilities (19 957) (26 744) Finance costs 7 (902) (974) Commission and other acquisition costs 8 (3 480) (3 171) Operating and administration expenses 9 &10 (8 700) (9 260) Total expenses (87 190) ( ) Profit before tax Income tax expense 11 (2 994) (3 965) Profit after tax for the financial year

12 Statement of comprehensive income Profit after tax for the financial year Other comprehensive income Items that will not be reclassified subsequently to profit or loss Property revaluation Policyholder property revaluation (shadow accounting) (82) (107) Actuarial gains on defined benefit plans and return on plan assets Item that will be reclassified subsequently to profit or loss Currency translation differences 4 60 Other comprehensive income for the year net of taxation Total comprehensive income

13 Statement of financial position Notes Assets Intangible assets Investment property Property and equipment Deferred tax assets Reinsurance contracts Post employment benefits Deferred acquisition costs Loans and advances Investments and securities Derivative assets Amounts due by group companies Other assets Cash and cash equivalents Non-current assets held for sale Total assets Liabilities Insurance contracts Investment contracts Borrowed funds Share-based payment liabilities Deferred revenue on investment contracts Deferred tax liabilities Derivative liabilities Amounts due to group companies Provisions Current tax payable Other liabilities Total liabilities Net assets Shareholders' equity Share capital and premium Other reserves Share-based payment reserve Retained earnings Total equity

14 Statement of changes in equity Share capital Share premium Other reserves Share-based payment reserve Total reserves Retained earnings Total equity Balance at 1 January Profit after tax Other comprehensive income Issue of share capital Dividends (27 151) (27 151) Total changes (22 410) (22 156) Balance at 31 December Profit after tax Other comprehensive income Dividends (3 510) (3 510) Other movements (48) (48) Total changes Balance at 31 December

15 Statement of cash flows Notes Cash flows from operating activities Cash used in operations 34 (8 397) (4 456) Interest received Dividends received Finance costs (902) (974) Tax paid 35 (2 127) (2 291) Net cash from operating activities Cash flows from investing activities Acquisition of property and equipment 14 (216) (166) Proceeds from disposal of property and equipment Acquisition of investment property 13 (536) (460) Proceeds from disposal of investment property Acquisition of intangible assets 12 (48) (198) Disposal of other intangible assets Net acquisition of financial instruments (3 603) (15 902) Net cash utilised in investing activities (1 943) (7 932) Cash flows from financing activities Issue of subordinated debt Dividends paid to company's shareholders 36 (3 510) (3 878) Net cash utilised by financing activities (2 510) (3 878) Net increase / (decrease) in cash and cash equivalents (1 237) Cash and cash equivalents at the beginning of the year Total cash and cash equivalents at end of the year

16 Accounting policies 1. Statement of compliance The company's annual financial statements have been prepared in accordance with International Financial Reporting Standards, and the Companies Act of South Africa. 1.1 Basis of preparation The financial statements provide information about the financial position, results of operations and changes in the financial position of the company. They have been prepared under historical cost convention, as modified by the accounting policies below. Except as described below, the accounting policies have been consistently applied to all periods presented. The company's consolidated financial statements are presented separately from these company-only financial statements. The financial statements are presented in South African Rands. The financial statements have been amended to reflect the introduction of Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities, which are mandatory for accounting periods commencing on or after 1 January. IAS 32 Offsetting Financial Assets and Financial Liabilities Financial assets and financial liabilities are offset and a net amount is presented in the statement of financial position, only if both of the following conditions are met: The entity currently has a legally enforceable right to set off the recognised amounts - i.e. a legal right to settle or eliminate all or a portion of an amount due to a creditor by applying against that amount an amount due from the creditor; and The entity has the intention to settle on a net basis; or realise the asset and settle the liability simultaneously (IAS 32.42, 45). The amendments to IAS 32 address inconsistencies that the IASB has identified in the application of some of the offsetting criteria by providing additional application guidance (IAS 32.BC78). The amendments clarify that an entity currently has a legally enforceable right to set off if the right is: - not contingent on a future event; and - enforceable both in the normal course of business, and in the event of default, insolvency or bankruptcy of the entity and all of the counterparties (IAS 32.AG38B). The amendments apply retrospectively for annual periods beginning on or after 1 January. The adoption of these amendments did not have an effect on the financial statements. 15

17 Accounting policies 1.2 Revenue Revenue comprises premium income from insurance contracts (net of outward reinsurance premiums) and investment contracts with discretionary participating features, fee income from investment management service contracts, commission income and investment income (excluding investment losses). Revenue is accounted for in accordance with the following accounting policies. Premiums on insurance contracts and investment contracts with a discretionary participating feature Premiums receivable under insurance contracts and investment contracts with a discretionary participating feature are stated gross of commission, and exclude taxes and levies. Premiums are recognised when due for payment. Outward reinsurance premiums are recognised when due for payment. Revenue on investment management service contracts Fees charged for investment management services provided in conjunction with an investment contract are recognised as income in the income statement as the services are provided. Initial fees, which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over periods between 5 and 10 years. Commission income Commission income is accounted for on an earned basis. 1.3 Insurance and investment contracts Classification of contracts Insurance contracts Contracts under which the company accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder, or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder, are classified as insurance contracts. Insurance risk is risk other than financial risk. Financial risk is the risk of a possible future change in one or more of a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. Insurance risk is significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance. If significant additional benefits would be payable in scenarios that have commercial substance, significant insurance risk exists even if the insured event is extremely unlikely or even if the expected present value of contingent cash flows is a small proportion of the expected present value of all the remaining contractual cash flows. A contract that is classified as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire. Contracts with a discretionary participating feature Contracts with a discretionary participating feature are those under which the policyholder holds a contractual right to receive additional payments as a supplement to guaranteed minimum payments. Those contracts that have insurance risk are classified as insurance contracts. Those that do not have insurance risk are classified as investment contracts. Investment contracts Contracts under which the transfer of insurance risk to the company from the policyholder is not significant, are classified as investment contracts. 16

18 Accounting policies 1.3 Insurance and investment contracts (continued) Claims paid on contracts Claims and benefits incurred in respect of insurance contracts and investment contracts with a discretionary participating feature include maturities, annuities, surrenders, death and disability payments and are recognised in the income statement. Maturity and annuity claims are recorded as they fall due for payment. Death and disability claims and surrenders are accounted for when notified. Reinsurance recoveries are accounted for in the same period as the related claim. Amounts paid under investment contracts other than those with a discretionary participating feature are recorded as deductions from investment contract liabilities. Insurance contract and investment contracts with a discretionary participating feature Insurance contract liabilities and liabilities for investment contracts with a discretionary participating feature are measured using the Financial Soundness Valuation (FSV) method as set out in the guidelines issued by the Actuarial Society of South Africa in Professional Guidance Note (SAP) 104 (version 7). Under this guideline, provisions are valued using realistic expectations of future experience, with compulsory margins for prudence and deferral of profit emergence. Surplus allocated to policyholders under investment contracts liabilities with a discretionary participating feature but not yet distributed (i.e. bonus stabilisation reserves) is included in the carrying value of liabilities. Investment options and guarantees embedded in insurance contracts have been calculated on a market-consistent basis, with additional margins added as permitted by APN 110. The company performs liability adequacy testing on its liabilities under insurance contracts (including investment contracts with discretionary participating features) to ensure that the carrying amount of its liabilities is sufficient in view of estimated future cash flows. When performing the liability adequacy test, the company discounts all contractual cash flows and compares this amount to the carrying value of the liability at discounted rates appropriate to the business in question. Where a shortfall is identified, an additional provision is made. The provision estimation techniques and assumptions are periodically reviewed, with any changes in estimates reflected in the income statement as they occur. These are described in more detail in notes 40 and 41. Whilst the directors consider that the gross insurance contract provisions and the related reinsurance recovery are fairly stated on the basis of the information currently available to them, the ultimate liability will vary as a result of subsequent information and events and may result in significant adjustments to the amount provided. The company applies shadow accounting in relation to certain insurance contract provisions where the measurement of the liability depends directly on the value of owner occupied property and the unrealised gains and losses on such property are recognised in other comprehensive income. Investment contracts (other than with discretionary participating feature) Liabilities under investment contracts without a discretionary participating feature, are classified as financial liabilities at fair value through profit or loss. For unit linked and market linked contracts, this is calculated as the account balance, which is the value of the units allocated to the policyholder, based on the value of the assets in the underlying fund (adjusted for tax). For other contracts, the fair value of the liability is determined by reference to the fair value of the underlying assets, and is in accordance with the FSV method, except that negative rand reserves arising from the capitalisation of future margins are not permitted. The fair value of the liability is subject to the deposit floor such that the liability established cannot be less than the amount repayable on demand. 17

19 Accounting policies 1.3 Insurance and investment contracts (continued) Unbundling The company has elected to unbundle the deposit components of products where the deposit components can be measured reliably. The deposit components are classified as financial liabilities at fair value through profit or loss. Acquisition costs Acquisition costs comprise all direct and indirect costs arising from the sale of contracts. Acquisition costs in respect of insurance contracts and investment contracts with a discretionary participating feature are expensed as incurred. The FSV method, used to value these contracts, makes allowance in the valuation for the charges to policyholders in respect of such acquisition costs, therefore no explicit deferred acquisition cost asset is recognised in the statement of financial position for these contracts. Costs incurred in acquiring investment management service contracts Incremental costs that are directly attributable to securing an investment management service contract are recognised as an asset to the extent they can be identified separately and measured reliably and it is probable that they will be recovered. Deferred acquisition costs are amortised over periods of between 5 and 10 years. 1.4 Intangible assets Intangible assets, which represent developed software, are measured at cost on initial recognition. Following initial recognition, intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses. Intangible assets are amortised over their useful life of 3 years on a straight-line basis and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period, residual values and the amortisation method are reviewed at each reporting date. Changes in expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. An intangible asset arising from development expenditure on an individual project is recognised only when the company meets the following recognition criteria: demonstration of the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete and the ability to measure reliably the expenditure during the development. The carrying value of capitalised development costs is reviewed for impairment annually when the asset is not available for use or more frequently when an indication of impairment arises during the reporting year. Subsequent expenditure on capitalised intangible assets is capitalised only when it meets the criteria listed above. Research costs are expensed as incurred. 1.5 Investment property Real estate held to earn rentals or for capital appreciation or both, is classified as investment property. It does not include owner-occupied property. Investment properties are stated at fair value. Internal professional valuers perform valuations annually. For practical reasons, valuations are carried out on a cyclical basis over a twelve-month period due to the large number of properties involved. External valuations are obtained on such a basis as to ensure that substantially all properties are valued externally once every three years on a cyclical basis. In the event of a material change in market conditions between the valuation date and reporting date an internal valuation is performed and adjustments made to reflect any material changes in value. 18

20 Accounting policies 1.5 Investment property (continued) The valuation methodology adopted is dependent upon the nature of the property. Income generating assets are valued using discounted cash flows. Land holdings and residential flats are valued according to sales of comparable properties. Near vacant properties are valued at land value less the estimated cost of demolition. Property developments are valued in a similar manner to income generating assets except where information about future net income cannot be determined with sufficient confidence, in which case fair value will be estimated with reference to the value of the land and the cost of construction to date. Land is valued according to the existing zoning and town planning scheme at the date of valuation, with exceptions made by the valuer for reasonable potential of a successful rezoning. Surpluses and deficits arising from changes in fair value and rental income are reflected as investment income in the income statement. For properties reclassified during the year from property and equipment to investment property, any revaluation gain arising is initially recognised in the income statement to the extent of previously charged impairment losses. Any residual excess is taken to the revaluation reserve. Revaluation deficits are recognised in the revaluation reserve to the extent of previously recognised gains and any residual deficit is accounted for in the income statement. Investment properties that are reclassified to owner-occupied property are revalued at the date of transfer, with any difference recognised in the income statement. 1.6 Property and equipment Owned assets Owner-occupied property is stated at revalued amounts, being fair value at the date of revaluation less subsequent accumulated depreciation and accumulated impairment losses. Equipment, principally computer equipment, motor vehicles, fixtures and furniture, are stated at cost less accumulated depreciation and accumulated impairment losses. Subsequent expenditure Subsequent expenditure is capitalised when it is measurable and will result in probable future economic benefits. Expenditure incurred to replace a separate component of an item of owner-occupied property or equipment is capitalised to the cost of the item and the component replaced is derecognised. All other expenditure is recognised in the income statement as an expense when incurred. Revaluation of owner-occupied property Owner-occupied property is stated at fair value. Internal professional valuers perform valuations annually. For practical reasons, valuations are carried out on a cyclical basis over a twelve-month period due to the large number of properties involved. External valuations are obtained on such a basis as to ensure that substantially all properties are externally valued once every three years on a cyclical basis. In the event of a material change in market conditions between the valuation date and reporting date, a valuation is performed and adjustments made to reflect any material changes in value. When an individual owner-occupied property is revalued, any increase or decrease in its carrying amount (as a result of the revaluation) is taken to other comprehensive income and presented in a revaluation reserve in equity, except to the extent it represents an increase that reverses a revaluation decrease previously recognised in the income statement, or a decrease that exceeds the revaluation surplus, then recognised in income statement. Derecognition On derecognition of owner-occupied property or an item of equipment, any gain or loss on disposal, determined as the difference between the net disposal proceeds and the carrying amount of the asset, is included in the income statement in the period of derecognition. In the case of owner-occupied property, any surplus in the revaluation reserve in respect of the individual property is transferred directly to retained earnings. 19

21 Accounting policies 1.6 Property and equipment (continued) 1.7 Tax Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of items of owner-occupied property and equipment. In the case of owner-occupied property, on revaluation any accumulated depreciation at the date of the revaluation is eliminated against the gross carrying amount of the property concerned and the net amount restated to the revalued amount. Subsequent depreciation charges are adjusted based on the revalued amount for each property. Any difference between the depreciation charge on the revalued amount and that which would have been charged under historic cost is transferred net of any related deferred tax, from the revaluation reserve to retained earnings as the property is utilised. Land is not depreciated. Owner-occupied property is currently depreciated over a period of 50 years using the straight-line method. Equipment is currently depreciated over a period between 2 to 5 years using the straight-line method. Residual values, depreciation methods and useful lives are reassessed at each financial year-end. Income tax charge for the year comprises current and deferred tax. Included within the tax charge are charges relating to normal income tax, taxes payable on behalf of policyholders and capital gains tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in other comprehensive income or equity, in which case it is recognised in other comprehensive income or equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet method based on temporary differences. Temporary differences are differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax base. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities using tax rates enacted or substantively enacted at the reporting date. Deferred tax is charged to the income statement except to the extent that it relates to a transaction that is recognised directly in other comprehensive income or equity. The effect on deferred tax of any changes in tax rates is recognised in the income statement, except to the extent that it relates to items previously charged or credited directly to other comprehensive income or equity. Deferred tax is not recognised on temporary differences that arise from temporary differences associated with investments in subsidiaries, associates and joint ventures where the timing of the reversal of the temporary differences can be controlled by the company and it is probable that the temporary differences will not reverse in the foreseeable future. A deferred tax asset is recognised to the extent that it is probable that future taxable income will be available, against which the unutilised tax losses and deductible temporary differences can be used. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefits will be realised. 20

22 Accounting policies 1.8 Reinsurance contracts Reinsurance contracts comprise contracts with reinsurers under which the company is compensated for losses on one or more contracts which are classified as insurance contracts. Reinsurance on contracts that do not meet this classification are classified as financial assets. Reinsurance assets principally include the reinsurers' share of liabilities in respect of contracts with policyholders. Amounts recoverable under reinsurance contracts are recognised in a manner consistent with the reinsured risks and in accordance with the terms of the reinsurance contract. Reinsurance is presented in the statement of financial position on a gross basis. Reinsurance assets are assessed for impairment at each reporting date. An asset is deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the company may not recover all amounts due, and that the event has a reliably measurable impact on the amounts that the company will receive from the reinsurer. Outward reinsurance premiums are recognised when due for payment. 1.9 Financial instruments Recognition and de-recognition of financial instruments Financial instruments comprise investments and securities, loans and advances, including amounts due by/to group companies, derivative instruments, cash and cash equivalents and investment contract liabilities, other than those with discretionary participating features and borrowed funds. Financial instruments are recognised when, and only when, the company becomes a party to the contractual provisions of the particular instrument. The company de-recognises a financial asset when and only when: The contractual rights to the cash flows arising from the financial asset have expired or been forfeited by the company; or It transfers the financial asset including substantially all the risks and rewards of ownership of the asset; or It transfers the financial asset, neither retaining nor transferring substantially all the risks and rewards of ownership of the asset, but no longer retains control of the asset. A financial liability is de-recognised when, and only when, the liability is extinguished, that is, when the obligation specified in the contract is discharged, cancelled or has expired. All purchases and sales of financial assets are recognised at trade date, which is the date that the company commits to purchase or sell the asset. Fair value measurement considerations The fair values of quoted financial assets are based on quoted prices. If the market for a financial asset is not active, the company establishes fair value using valuation techniques that refer as far as possible to observable market data. These include the use of recent arm's-length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models. To the extent that the fair values of unlisted equity instruments cannot be measured reliably, cost may be an appropriate estimate of fair value. Categories of financial instruments Financial instruments are categorised as financial assets and financial liabilities at fair value through profit or loss and financial assets and financial liabilities at amortised cost. An analysis of the company's statement of financial position, showing the categorisation of financial instruments is set out in note 4. 21

23 Accounting policies 1.9 Financial instruments (continued) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss comprise those financial assets where the company's business model is to manage the assets on a fair value basis in accordance with a documented risk management and/or investment strategy and those that the company has elected to designate as at fair value through profit or loss in order to eliminate or significantly reduce a measurement or recognition inconsistency that would otherwise arise when using a different measurement basis. This measurement election is typically utilised in respect of financial assets held to support liabilities in respect of contracts with policyholders. Financial assets at fair value through profit or loss are initially recognised at fair value excluding transaction costs directly attributable to their acquisition which are recognised immediately in the income statement. After initial recognition, financial assets at fair value through profit or loss are measured at fair value with resulting fair value gain or loss adjustments being recognised directly in the income statement. All related fair value gains and losses are included in investment income. Interest earned whilst holding financial assets at fair value through profit or loss is included in investment income. Dividends received are included in investment income. Financial assets at amortised cost Financial assets at amortised cost are initially recognised at fair value. Subsequent to initial measurement, such assets are measured using the effective interest method less any impairment losses. Interest received is recognised as part of investment income. All financial assets at amortised cost are recognised when cash is advanced to borrowers. Derivative financial instruments Derivative instruments, including options, futures, forwards and swaps are used to economically hedge against market and currency movements in the values of assets and liabilities. Listed derivatives are stated at quoted prices. Unlisted derivative instruments are valued using standard market valuation techniques. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than 90 days maturity from the date of acquisition, including cash and balances with banks but excluding cash and cash equivalent instruments held for investing purposes. It excludes cash balances held in policyholder investment portfolios. Cash balances include cash collateral held. Financial liabilities Financial liabilities (other than investment contracts) are initially recognised at fair value less directly attributable transaction costs. After initial recognition, financial liabilities are measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process. Interest income and expense Interest income and expense is recognised in the income statement using the effective interest method taking into account the expected timing and amount of cash flows. Interest income and expense includes the amortisation of any discount or premium or other differences between the initial carrying amount of an interest-bearing instrument and its amount at maturity calculated on an effective interest method. Dividend income Dividend income is recognised in full on the ex-dividend date as investment income. 22

24 Accounting policies 1.9 Financial instruments (continued) Dividends from certain redeemable preference shares are recognised as income on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is probable such income will accrue to the company. Offsetting Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a current legally enforceable right to set off and there is intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. Income and expense items are offset only to the extent that their related instruments have been offset in the statement of financial position. Lending of securities The equities or bonds on loan under securities lending arrangements, and not the collateral security, are reflected in the statement of financial position of the company. Scrip lending fees received are included under fee income. The company continues to recognise the related income on the equities and bonds on loan. Impairment of financial assets The company assesses at each reporting date whether there is any objective evidence that a financial asset or group of financial assets, excluding financial assets at fair value through profit or loss, is impaired. Assets carried at amortised cost If there is objective evidence that an impairment loss on loans or receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced either directly or through use of an allowance account. The impairment loss is recognised in profit or loss. The company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in profit or loss, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. 23

25 Accounting policies 1.10 Foreign currency translation Foreign currency transactions and balances other than in respect of foreign branches Foreign currency transactions are measured using South African Rands, the company's functional currency, on initial recognition by applying the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the relevant functional currency at rates of exchange ruling at the reporting date. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated into the functional currency at foreign exchange rates ruling at the dates the fair values were determined. Non-monetary assets and liabilities denominated in foreign currencies that are stated at historical cost are converted into the functional currency at the rate of exchange ruling at the date of the initial recognition of the asset and liability and are not subsequently translated. Exchange gains and losses on the translation and settlement of foreign currency assets and liabilities are recognised as investment income in the income statement. Exchange differences for non-monetary items are recognised in other comprehensive income when the changes in the fair value of the non-monetary item are recognised in other comprehensive income, and in the income statement if the changes in fair value of the non-monetary item are recognised in the income statement. Exchange gains and losses on monetary available for sale instruments are recognised in the income statement. Foreign operations The assets and liabilities held by foreign branches to support liabilities in respect of contracts with policyholders are translated using the year-end exchange rates, and their income and expenses using average rates which approximates the exchange rate at the transaction date. Foreign currency differences are recognised directly in other comprehensive income accumulated in foreign currency translation reserve in equity. When a foreign operation is disposed of, in part or in full, the relevant amount in the foreign currency translation reserve is transferred to profit or loss Employee benefits Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. An accrual is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the company has a present legal or constructive obligation to pay this amount as a result of past service provided by employees and the obligation can be estimated reliably. Defined contribution plan Contributions in respect of defined contribution retirement plans are recognised as an expense in the income statement as incurred. Defined benefit plan In respect of the company s defined benefit retirement plan, the projected unit credit method is used to determine the present value of the defined benefit obligations and the related current service cost, and where applicable, past service cost. The current service cost is recognised as an expense. Past service costs arising from plan amendments or curtailment are recognised in profit or loss at the earlier of when the amendment occurs or when the related restructuring or termination costs are recognised. The defined benefit liability is the aggregate of the present value of the defined benefit obligation and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the asset is limited to the net total of the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. 24

26 Accounting policies 1.11 Employee benefits (continued) Remeasurement of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling, are recognised immediately as other income. Other post-retirement benefit plan The company makes provision for post-retirement medical, disability and housing benefits for eligible employees. Nonpension post-retirement benefits are accounted for according to their nature, either as defined contribution or defined benefit plans. Other long-term employee benefits The company's net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value. Remeasurements are recognised in profit or loss in the period in which they arise Provisions Provisions are recognised when the company has a present legal or constructive obligation as a result of past events, for which it is probable that an outflow of economic benefits will occur, and where a reliable estimate can be made of the amount of the obligation. Where the company expects some or all of a provision to be reimbursed, for example under the company's insurance arrangements, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of discounting is material, provisions are discounted. The discount rate used is a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Future operating costs or losses are not provided for Share-based payment Cash-settled share-based payment transactions The services received in cash-settled share-based payment transactions with employees and the liability to pay for those services, are recognised at fair value as the employee renders services. Until the liability is settled, the fair value of the liability is re-measured at each reporting date and at the date of settlement, with any changes in fair value recognised in profit or loss for the period. The fair value of the liability is measured at the fair value of the awards or options, by applying standard option pricing models, taking into account terms and conditions on which the share awards or options were granted, and the extent to which the employees have rendered services to date. Equity-settled share-based payment transactions in respect of the Black Economic Empowerment (BEE) transaction The services received from Black Business Partners, unions and distributors in terms of the Old Mutual Black Economic Empowerment transaction entered into in 2005 are equity-settled and are measured at the fair value of the equity instruments granted. The fair value of those equity instruments was measured at grant date and is not subsequently re-measured. The equity instruments vested immediately and are not subject to any service conditions before the participants become unconditionally entitled to those instruments. As a result, the goods and services received including BEE equity ownership credentials are recognised in full on grant date in profit or loss for the period, with a corresponding increase in equity. 25

27 Accounting policies 1.14 Segment reporting The company s segmental results are presented for two reporting segments, Retail and Corporate with the balance of the company's financial results reflected as attributable to shareholders. This is consistent with the way that management and the board of directors considers information when making decisions and is the basis on which resources are allocated and performance assessed by management and the board of directors. The reporting segments are described as follows: The Retail segment offers a wide range of wealth creation and protection products to individual customers. They constitute a combination of Old Mutual s life and savings, unit trusts, healthcare and group schemes products. The Corporate segment serves the corporate market comprising groups of individuals such as companies, medical aid and retirement funds, unions and public sector bodies. The segment provides clients with a set of investment, savings, risk management and administration products, and services. The products from both segments are sold in South Africa and there is no specific geographical concentration. Segment revenue is revenue that is directly attributable to a segment and the relevant portion of the company's revenue that can be allocated on a reasonable basis. Segment expense is expense resulting from the operating activities of a segment that is directly attributable to the segment and the relevant portion of an expense that can be allocated on a reasonable basis to a segment. Segment assets are those operating assets that are employed by a segment in its operating activities and that are either directly attributable to the segment or can be allocated to the segment on a reasonable basis. Segment liabilities are those operating liabilities that result from operating activities of a segment. The information reflected in note 3 reflects the measures of profit or loss, assets and liabilities for each segment as regularly provided to management and the board of directors. There are no differences between the measurement of the assets and liabilities reflected in the primary financial statements and that reported for the segments. Assets, liabilities, revenues or expenses that are not directly attributable to a particular segment are allocated between segments where there is a reasonable basis for doing so. The company accounts for inter-segment revenues and transfers as if the transactions were with third parties at current market prices. Given the nature of the operations, there are no major customers within any of the segments Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made and rentals received under operating leases are recognised in the income statement on a straight-line basis over the period of the lease Impairment of non-financial assets The carrying amounts of the company's assets, other than financial assets and deferred tax assets and investment property, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. The recoverable amount is the greater of the fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised whenever the carrying amount of the asset exceeds its recoverable amount. Impairment losses are recognised in the income statement. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. The increased carrying amount of an asset attributable to a reversal of an impairment loss will not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years Dividend distribution Dividend distributions to the company's shareholder are recognised in the period in which the dividend distribution is authorised and approved by the company's shareholder. 26

28 Accounting policies 1.18 Borrowing costs Borrowing costs are recognised as an expense in the period in which they are incurred Critical accounting estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Critical accounting estimates are those which involve the most complex or subjective judgements or assessments. The areas of the company s business that typically require such estimates are life insurance contract liabilities, determination of the fair value for financial assets and liabilities, provisions, impairment charges, deferred acquisition costs, share-based payment liabilities and tax provisions. Insurance contract accounting is discussed in note 1.3 above, and further detail of the methodology used in determining insurance contract liabilities is included in note 41. Accounting for deferred acquisition cost assets is discussed in note 1.3. The fair values of financial assets and liabilities are classified and accounted for in accordance with the policies set out in section 1.3 and 1.9 above. They are valued on the basis of quoted market prices in so far as this is possible. If prices are not readily determinable, fair value is based either on internal valuation models or management estimates of amounts that could be realised under current market conditions. Fair values of certain financial instruments including derivative instruments together with fair values of share-based payment liabilities are determined using pricing models that consider, among other factors, contractual and market prices, correlations, yield curves, credit spreads, and volatility factors. The nature and the key assumptions made in determining provisions are disclosed in note 30. The assumptions applied in valuing share-based payment liabilities are disclosed in note 29. Financial assets are subject to regular impairment reviews as required. Impairments are measured as the difference between the cost (or amortised cost) of a particular asset and the current fair value or recoverable amount. Impairments are recorded in the income statement in the period in which they occur. The company s policy in relation to investment securities and loans and receivables is described in note 1.9 above. The company in the ordinary course of business enters into transactions that expose the group to tax, legal and business risks. Provisions are made for known liabilities that are expected to materialise. Possible obligations and known liabilities where no reliable estimate can be made or it is considered improbable that an outflow would result are reported as contingent liabilities. Historically, a number of group companies entered into structured transactions with third parties using their tax bases. This may expose the company to tax risk Share capital Ordinary and preference share capital are classified as equity if they are non-redeemable by the holder, and if dividends are discretionary. Coupon payments on preference share equity instruments are recognised as distributions within equity. 27

29 Accounting policies 1.21 Non-current assets held-for-sale Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use. Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to financial assets, deferred tax assets, employee benefit assets or investment property, which continue to be measured in accordance with the company's other accounting policies. Impairment losses on initial classification as held-for-sale or held-for-distribution and subsequent gains and losses on remeasurement are recognised in profit or loss. Once classified as held-for-sale, intangible assets and property and equipment are no longer amortised or depreciated, and any equity-accounted investee is no longer equity accounted. 28

30 2. New standards and interpretations The following new standards and interpretations will have a significant impact on these financial statements in future reporting periods. 2.1 Standards and interpretations not early adopted in these financial statements Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation (effective 1 January 2016) - The amendments to IAS 16 Property, Plant and Equipment explicitly state that revenue-based methods of depreciation cannot be used for property, plant and equipment. The amendments to IAS 38 Intangible Assets introduce a rebuttable presumption that the use of revenue-based amortisation methods for intangible assets is inappropriate. The presumption can be overcome only when revenue and the consumption of the economic benefits of the intangible asset are highly correlated, or when the intangible asset is expressed as a measure of revenue. The company does not hold any equipment or intangible assets amortised on a revenue basis and therefore the amendments are not expected to have a significant impact on the company. The amendments apply prospectively for annual periods beginning on or after 1 January 2016 and early adoption is permitted. Amendments to IAS 19: Employee benefits (effective 1 July ) - The amendments are relevant only to defined plans (post-employment plans or other long-term employee defined benefit plans) that involve contributions from employees of third parties meeting certain criteria. The amendments to IAS 19 introduce a relief that will reduce the complexity and burden of accounting for certain contributions from employees or third parties. When contributions are eligible for the practical expedient, a company is permitted (but not required) to recognise them as a reduction of the service cost in the period in which the related service is rendered. The amendments apply prospectively for annual periods beginning on or after 1 July and is not expected to have a significant impact. IFRS 9 Financial Instruments (effective 1 January 2018) - IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). The existing IAS 39 categories of held-to-maturity, loans and receivables and available-for-sale are removed. The company had previously adopted these new IFRS 9 classification criteria when it adopted the 2009 version of IFRS 9. IFRS 9 retains almost all of the existing requirements from IAS 39 for financial liabilities. However any gain or loss on a financial liability designated at FVTPL attributable to changes in own credit risk is generally presented in other comprehensive income with remaining change in fair value presented in profit or loss. IFRS 9 replaces the incurred loss model in IAS 39 with an expected credit loss approach for debt instruments measured at amortised cost or FVOCI. IFRS 9 will align hedge accounting more closely with risk management of an entity. In terms of IFRS 9 additional exposures may be hedged items. The residual IFRS 9 requirements (other than the financial assets classification) will be adopted for the first time for the year ending 31 December The impact on the financial statements has not yet been estimated. IFRS 15 Revenue from Contracts with Customers (effective 1 January 2017) - In terms of IFRS 15, entities will apply a five-step model to determine when to recognise revenue, and at what amount. The model specifies that revenue should be recognised when (or as) an entity transfers control of goods or services to customers at the amount to which the entity expects to be entitled to. IFRS 15 provides guidance on when to capitalise costs of obtaining or fulfilling a contract that are not addressed in other standards. IFRS 15 will be adopted for the first time for the year ending 31 December The impact on the financial statements has not yet been estimated. 29

31 2. New standards and interpretations (continued) Annual Improvements to IFRSs Cycle (effective annual periods beginning on or after 1 July ) - The following clarifications were finalised for certain standards: IFRS 2 Share-based Payment - IFRS 2 has been amended to clarify the definition of 'vesting condition' by separately defining 'performance condition' and 'service condition'. IFRS 3 Business Combinations - IFRS 3 has been amended to clarify the classification and measurement of contingent consideration in a business combination. IFRS 8 Operating Segments - IFRS 8 has been amended to explicitly require the disclosure of judgements made by management in applying the aggregation criteria. IFRS 13 Fair Value Measurement - The IASB has clarified that, in issuing IFRS 13 and making consequential amendments to IAS 39 and IFRS 9, it did not intend to prevent entities from measuring short-term receivables and payables that have no stated interest rate at their invoiced amounts without discounting, if the effect of discounting is immaterial. IAS 24 Related Party Disclosures - The definition of a 'related party' is extended to include a management entity that provides key management personnel services to the reporting entity, either directly or through a group entity. Annual Improvements to IFRSs Cycle (effective annual periods beginning on or after 1 July ) - The following clarifications were finalised for certain standards: IFRS 3 Business Combination - IFRS 3 has been amended to clarify that the standard does not apply to the accounting for the formation of all types of joint arrangements in IFRS 11 Joint Arrangements - i.e. including joint operations - in the financial statements of the joint arrangements themselves. IFRS 13 Fair Value Measurement - The scope of the IFRS 13 portfolio exception - whereby entities are exempted from measuring the fair value of a group of financial assets and financial liabilities with offsetting risk positions on a net basis if certain conditions are met - has been aligned with the scope of IAS 39 and IFRS 9. IAS 40 Investment Property - IAS 40 has been amended to clarify that an entity should assess whether an acquired property is an investment property under IAS 40 and perform a separate assessment under IFRS 3 to determine whether the acquisition of the investment property constitutes a business combination. 30

32 3. Segment information Income statement Retail Corporate Total Segment revenue Gross earned premiums Outward reinsurance (887) (111) (998) Net earned premiums Investment income (net of investment losses) Fee and commission income Other income Segment expenses Claims and benefits (24 889) (29 733) (54 622) Reinsurance recoveries 826 (355) 471 Net claims and benefits incurred (including change in (24 063) (30 088) (54 151) insurance contract provisions) Change in investment contract liabilities (13 019) (6 938) (19 957) Commission and other acquisition costs (3 437) (43) (3 480) Operating and administration expenses (6 612) (1 871) (8 483) Segment result Shareholder income Investment income Other income 60 Shareholder expenses Finance costs (902) Operating and administration expenses (217) Profit before tax Income tax expense (2 994) Profit after tax for the financial year Statement of financial position Segment assets Shareholder assets Total assets Insurance contract liabilities ( ) (57 720) ( ) Investment contracts with discretionary participation (22 263) ( ) ( ) features Investment contracts ( ) (60 335) ( ) Other liabilities (14 533) (2 022) (16 555) Segment liabilities ( ) ( ) ( ) Shareholder liabilities (25 714) Total liabilities ( ) 31

33 3. Segment information (continued) Income statement Retail Corporate Total Segment revenue Gross earned premiums Outward reinsurance (815) (85) (900) Net earned premiums Investment income (net of investment losses Fee and commission income Other income Segment expenses Claims and benefits (26 818) (34 462) (61 280) Reinsurance recoveries Net claims and benefits incurred (including change in (25 900) (34 328) (60 228) insurance contract provisions) Change in investment contract liabilities (21 116) (5 628) (26 744) Commission and other acquisition costs (3 125) (46) (3 171) Operating and administration expenses (6 713) (1 701) (8 414) Segment result Shareholder income Investment income Other income 46 Shareholder expenses Finance costs (974) Operating and administration expenses (846) Profit before tax Income tax expense (3 965) Profit after tax for the financial year Statement of financial position Segment assets Shareholder assets Total assets Insurance contract liabilities ( ) (55 783) ( ) Investment contracts with discretionary participation (19 560) (93 967) ( ) features Investment contract liabilities ( ) (39 094) ( ) Other liabilities (12 127) (1 660) (13 787) Segment liabilities ( ) ( ) ( ) Shareholder liabilities (28 152) Total liabilities ( ) 32

34 4. Financial assets and liabilities The company is exposed to financial risk through its financial assets (investments and loans), financial liabilities (investment contracts and borrowings), reinsurance assets and insurance liabilities. The key focus of financial risk management for the company is ensuring that the proceeds from its financial assets are sufficient to fund the obligations arising from its insurance operations. The most important components of financial risk are credit risk, market risk (arising from changes in equity, and bond prices, interest and foreign exchange rates), and liquidity risk. Market risk arises from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements and/or conditions. Categories of financial instruments The analysis of assets and liabilities into their accounting categories is set out in the following table. For completeness, assets or liabilities of a non-financial nature are reflected in the other assets and liabilities category. Fair value through profit or loss Amortised cost Other assets Total Assets Intangible assets Investment property Property and equipment Deferred tax assets Reinsurance contracts Post employment benefits Deferred acquisition costs Loans and advances Investments and securities Derivative assets Amounts due by group companies Other assets Cash and cash equivalents Non-current assets held-for-sale

35 4. Financial assets and liabilities (continued) Fair value through profit or loss Amortised cost Other assets Total Assets Intangible assets Investment property Property and equipment Deferred tax assets Reinsurance contracts Post employment benefits Deferred acquisition costs Loans and advances Investments and securities Derivative assets Amounts due by group companies Other assets Cash and cash equivalents

36 4. Financial assets and liabilities (continued) Fair value through profit or loss Amortised cost Other liabilities Total Liabilities Insurance contract liabilities Investment contract liabilities Borrowed funds Share-based payment liabilities Deferred revenue Deferred tax liabilities Derivative liabilities Amounts due to group companies Provisions Current tax payable Other liabilities Fair value through profit or loss Amortised cost Other liabilities Total Liabilities Insurance contract liabilities Investment contract liabilities Borrowed funds Share-based payment liabilities Deferred revenue Deferred tax liabilities Derivative liabilities Amounts due to group companies Provisions Current tax payable Other liabilities Fair values of financial assets and liabilities Determination of fair value All financial instruments are initially recorded at fair value. The fair value of a financial instrument on initial recognition is normally the transaction price, that is, the fair value of the consideration given or received. In certain circumstances, however, the initial fair value may be based on other observable current market transactions in the same instrument, without modification or repackaging, or on a valuation technique whose variables include only observable data. 35

37 4. Financial assets and liabilities (continued) Subsequent to initial recognition, the fair values of financial instruments measured at fair value that are quoted in active markets are based on mid prices for assets, which in certain circumstances includes using quotations from independent third parties such as brokers and pricing services. When quoted prices are not available, fair values are determined by using valuation techniques that refer as far as possible to observable market data. These include comparison with similar instruments where market observable prices exist, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. A number of factors such as bid offer spread, credit profile, servicing costs and model uncertainty are taken into account, as appropriate, when values are calculated using a valuation technique. Changes in the assumptions used in such valuations could impact the reported value of such instruments. The fair value of derivative instruments reflects the estimated amount the company would receive or pay in an arm s length transaction. This amount is determined using quotations from independent third parties or by using standard valuation techniques. For certain derivative instruments, fair values may be determined in whole or in part using techniques based on assumptions that are not supported by prices from current market transactions or observable market data. Investments and securities The fair values of listed investments and securities are based on mid prices. For unlisted investments and securities, fair values are determined using valuation techniques that refer as far as possible to observable market data (see above). Investment contracts The approach to determining the fair values of investment contracts is set out in the accounting policies section for insurance and investment contract business. Borrowed funds The carrying value of a portion of borrowed funds is based on amortised cost, with the remainder carried at fair value. Where the fair value of amounts included in borrowed funds are also disclosed these are based on quoted market prices at the reporting date where applicable, or by reference to quoted prices of similar instruments. Other financial assets and liabilities The fair values of other financial assets and liabilities are reasonably approximated by the carrying amounts reflected in the statement of financial position. Fair value hierarchy Fair values are determined according to the following hierarchy: Level 1 quoted market prices: financial assets and liabilities with quoted prices for identical instruments in active markets. Level 2 valuation techniques using observable inputs: quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial assets and liabilities valued using models where all significant inputs are observable. Level 3 valuation techniques using significant unobservable inputs: financial assets and liabilities valued using valuation techniques where one or more significant inputs are unobservable. The best evidence of fair value is a quoted price in an active market. In the event that the market for a financial asset or liability is not active, a valuation technique is used. The judgement as to whether a market is active may include, for example, consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads. In inactive markets, obtaining assurance that the transaction price provides evidence of fair value or determining the adjustments to transaction prices that are necessary to measure the fair value of the asset or liability requires additional work during the valuation process. 36

38 4. Financial assets and liabilities (continued) The majority of valuation techniques employ only observable market data, and so the reliability of the fair value measurement is high. However, certain financial assets and liabilities are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable and, for them, the derivation of fair value is more judgemental. A financial asset or liability in its entirety is classified as valued using significant unobservable inputs if a significant proportion of that asset or liability s carrying amount is driven by unobservable inputs. In this context, unobservable means that there is little or no current market data available for which to determine the price at which an arm s length transaction is likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value. Furthermore, in some cases the majority of the fair value derived from a valuation technique with significant unobservable inputs may be attributable to observable inputs. Consequently, the effect of uncertainty in determining unobservable inputs will generally be restricted to uncertainty about the overall fair value of the asset or liability being measured. Additional information on the impact of unobservable inputs is provided in the section headed Effect of changes in significant unobservable assumptions to reasonably possible alternatives. Fair value hierarchy Level 1 Level 2 Level 3 Total Financial assets at fair value Derivative assets Investment and securities Level 1 Level 2 Level 3 Total Financial assets at fair value Derivative assets Investment and securities Level 1 Level 2 Total Financial liabilities at fair value Derivative liabilities Investment contracts Borrowed funds Level 1 Level 2 Total Financial liabilities at fair value Derivative liabilities Investment contracts

39 4. Financial assets and liabilities (continued) Movement in level 3 assets Rm Rm At beginning of the year Gains recognised in income statement Purchases and issues Sales and settlements (2 667) (6 240) Transfers into level 3 from other categories At end of the year For designated level 3 assets held at the end of the year, net gains of R7 755 million were recognised in the income statement as investment income (: net gains of R2 415 million). Effect of changes in assumptions Favourable and unfavourable changes are determined on the basis of changes in the value of the financial asset or liability as a result of varying the levels of the unobservable parameters using statistical techniques. When parameters are not amenable to statistical analysis, quantification of uncertainty is judgemental. When the fair value of a financial asset or liability is affected by more than one unobservable assumption, the figures shown reflect the most favourable or most unfavourable change from varying the assumptions individually. In respect of private equity investments, the valuations are assessed on an asset-by-asset basis using a valuation methodology appropriate to the specific investment, in line with industry guidelines. In many of the methodologies, the principal assumption is the valuation multiple to be applied to the main financial indicators including, for example, multiples for comparable listed companies and discounts to marketability. Gains and losses recognised in the income statement principally are taken through investment income. For asset-backed securities whose prices are unobservable, models are used to generate the expected value of the asset, incorporating benchmark information on factors such as prepayment patterns, default rates, loss severities and the historical performance of the underlying assets. The models used are calibrated by using securities for which external market information is available. For structured notes and other derivatives, principle assumptions concern the future volatility of asset values and the future correlation between asset values. These principle assumptions include credit volatilities and correlations used in the valuation of the structured credit derivatives. For such unobservable assumptions, estimates are based on available market data, which may include the use of a proxy method to derive a volatility or correlation from comparable assets for which market data is more readily available, and examination of historical levels. 38

40 4. Financial assets and liabilities (continued) Analysis of reasonably possible alternative assumptions - level 3 assets Favourable changes Unfavourable changes Favourable changes Unfavourable changes Level 3 financial assets Investments and securities (2 854) (2 071) Key inputs and assumptions used in the valuation models include discount rates (with the reasonably possible alternative assumptions calculated by increasing/decreasing the discount rate by 10%) and price earnings ratio (with the reasonably possible alternative assumptions calculated by increasing/decreasing the price earnings ratio by 10%). The table below sets out information about significant unobservable inputs used at year end in measuring financial instruments categorised as level 3: Valuation technique Significant unobservable input Range of unobservable inputs Discounted cash flow Risk adjusted discount rate: -Equity risk premium -Liquidity risk premium -Nominal risk free rate 5% - 8.5% 10% - 25% 7% - 8% Price earnings (PE) model/multiple/embedded PE ratio/multiple: discounts applied, 15% - 30% value eg.marketability Sum of parts Net Asset Value (NAV adjustments) PE ratio Option inputs: -Continuous interest rates -Volatility - Dividend yield Risk adjusted discount rate: -Beta -Risk free rate Option inputs: -Continuous interest rate -volatility -dividend yielded 15% - 30% 5% - 6% 30% -31% 4% - 5% % - 9% 5% - 6% 22% - 47% 0% - 4% 39

41 4. Financial assets and liabilities (continued) The following table presents the fair value hierarchy for assets and liabilities for which fair values is disclosed, but which are not recognised at fair value. Fair value is not the value ascribed to a financial asset or liability by management but it is representative of what the market would be willing to pay for an asset or to settle or transfer the liability. Level 1 Level 2 Level 3 Total Fair values Total Carrying amount Assets Loans and advances Other assets Cash and cash equivalents Liabilities Borrowed funds Other liabilities Level 1 Level 2 Level 3 Total Fair values Total carrying amount Assets Loan and advances Other assets Cash and cash equivalents Liabilities Borrowed funds Other liabilities Financial instruments that are subject to master netting agreements The company offsets financial assets and liabilities in the statement of financial position when it has a legal enforceable right to do so and intends to settle on a net basis or at a simultaneous time. Certain master netting agreements do not provide the company with the current legally enforceable right to offset the instruments. The majority of these transactions are governed by the princples of ISDA or similar type of agreements. These agreements aim to protect the parties in the case of default. The potential effect of netting, provided that master netting agreements are in place for all counterparties, is: Derivative financial instruments assets: Gross amounts of recognised financial instruments in the statement of financial position amounted to R3 993 million (: R6 142 million). Derivative financial instruments liabilities: Gross amounts of recognised financial instruments in the statement of financial position amounted to R5 323 million (: R8 269 million). Cash and bond collateral amounts not offset against derivative assets and liabilities in the statement of financial position are R1 139 million (: R1 869 million). 40

42 5. Investment income Interest and similar income Loans and advances Policyholder loans Investments and securities Government and government-guaranteed securities Other debt securities, preference shares and debentures Pooled investments Short-term funds and securities treated as investments Other Cash and cash equivalents Collateral held Dividend income Investments and securities Equity securities Pooled investments Rental income from investment property Fair value gains/(losses) Investment property Investments and securities * Derivative instruments (4 715) Foreign currency losses - (12) Total investment income recognised in profit or loss * Included in gains recognised in income are transaction costs amounting to R 98 million (: R 106 million). 6. Fee and commission income Investment contracts Investment management fees Change in deferred revenue Commission income

43 7. Finance costs Interest payable Borrowed funds - subordinated debt Collateral held Other interest expense 6 31 Fair value gains and losses on borrowed funds Borrowed funds (4) - Derivative instruments used as economic hedges Total interest expense included above for liabilities at fair value through profit and loss 8-8. Commissions and other acquisition costs Commission and fee expenses Other acquisition costs Change in deferred acquisition costs (119) (81) 9. Operating and administration expenses Staff costs (excluding directors' emoluments) Wages and salaries Social security costs Defined contribution plans Bonus and incentives Share-based payments Other Less: Staff costs included in other acquisition costs (269) (382) Operating and administration expenses include Amortisation on intangible assets Asset management expenses Depreciation of property and equipment Technical and professional fees Auditors' remuneration Statutory audit services - current year Statutory audit services - prior year underprovision - 1 Other non-audit related services

44 11. Income tax expense Major components of the tax expense Current tax Income tax Current year Prior year adjustments 62 (123) Capital gains tax Dividends withholdings tax Deferred tax Originating and reversing temporary differences - current year Total current tax Total deferred tax Total tax expense Reconciliation of tax rate on profit before tax % % Standard rate of tax 28,0 28,0 Prior year adjustments Shareholder (0,4) (1,6) Policyholder 1,0 - Exempt income (12,0) (4,4) Disallowed expenses 2,4 2,8 Capital gains tax - rates (1,9) 16,3 Policyholder tax 1,0 5,3 Other 0,3 (0,1) Effective tax rate 18,4 46,3 Shareholder tax Policyholder tax Total tax expense

45 12. Intangible assets Development expenditure Carrying amount at beginning of the year Additions Amortisation (24) (22) Disposals (119) - Carrying amount at end of the year Cost Accumulated amortisation and impairment losses (413) (389) Carrying amount at end of the year Investment property Carrying amount at beginning of the year Additions Disposals (1 579) (8 728) Revaluation Transfers from property and equipment Transfers to non-current assets held-for-sale (2 800) - Carrying amount at end of the year The entire carrying value relates to freehold property. Non-current assets held for sale Carrying value of assets classified as held-for-sale: 50% share in Menlyn Shopping Centre The company has agreed to dispose of the remaining portion of the Menlyn Shopping Centre in South Africa for R3 200 million, subsequent to the completion of agreed upon improvements on the centre. This transaction is subject to Competition Commission approval and transfer by the Deeds office. As part of the transaction the company agreed to acquire the 50% share of the Cavendish Shopping Centre for R1 100 million. These assets form part of the policyholder property portfolio. There will be no impact on profit and loss as a result of this transaction. Other items Rental income from investment property Direct operating expenses (97) (186)

46 13. Investment property (continued) Subject to certain terms and conditions being met, certain pre-emptive rights have been granted by the company to a third party, whereby the third party has a right of first refusal over the sale of certain of the company's properties to the value of R6 226 million. These pre-emptive rights will cease to have effect with the disposal of the Menlyn property. Refer to note 42 for further details on this disposal. Properties to the value of R607 million were sold to a subsidiary of the company during the year. The subsidiary company has signed a deed of adherence in respect of the pre-emptive rights in favour of the third party, however the pre-emptive rights agreement with regards to these properties was initially contracted between the company and the third party. The fair value of the company's properties are categorised into level 3 of the fair value hierarchy. The valuation techniques used in the determination of the fair values for investment and owner-occupied properties, as well as the unobservable inputs used in the valuation models are as follows: Income generating assets - commercial, retail and industrial properties: valued using the internationally and locally recognised Discounted Cash Flow method. A minimum of five years (if required for specific leases, a longer period is used) of net income is discounted at a market related rate, together with the present value of the capitalised net income in year six. Net income is determined by considering gross income, vacancies and lease obligations from which all normalised operating expenditure and capital expenditure is deducted. The discount rate is determined with reference to the current market conditions and is constantly monitored by reference to comparable market transactions. Valuation capitalisation and discount rates are based on industry guidelines e.g. SAPOA, IPD as well as comparison to the listed sector property funds. Market rentals are based on the valuers assumptions and information they have based on similar valuations they have done our sourced from external brokers. Land holdings or land: As a general rule, these will be valued according to the prevailing town planning scheme and current zoning at the date of valuation. The land is valued according to its current condition and zoning. Should the valuer consider that the site has potential for a different zoning, the valuer is permitted to report a value subject to receipt of zoning and advise accordingly. Land is to be valued by the direct comparison method by reference to recent sales of comparable properties in the neighbourhood or similar localities on a land per square metre, bulk per square metre or unit basis. Investment property under construction: Valued in a similar manner to income producing properties (less outstanding development costs), except where the fair value of the investment property is not reliably determinable. In certain exceptional cases the cost model approach of land value plus developmet costs to date can be adopted to value developments in progress. Owner-occupied properties: Valued according to the sales of comparable properties. Owner-occupied properties are valued as at 31 December each year by internal professional valuers and external valuations are obtained once every 3 years. 45

47 13. Investment property (continued) The table below sets out information about significant unobservable inputs used as year end in measuring investment properties categorised at Level 3: Type of property Valuation approach Key unobservable inputs Range of estimates for unobservable inputs Income generating assets - commercial/retail/industrial properties Land 14. Property and equipment Valued using the internationally and locally recognised Discounted Cash Flow (DCF) method. A minimum of five years (if required for specific leases, a longer period is used) of net income is discounted at a market related rate, together with the present value of the capitalised net income in year six. Net income is determined by considering gross income, vacancies and lease obligations from which all normalised operating expenditure and capital expenditure is deducted. The discount rate is determined with reference to the current market conditions and is constantly monitored by reference to comparable market transactions. Valued according to the existing zoning and town planning scheme at the date of valuation. However there are cases where exceptional circumstances need to be considered. Valuation capitalisation and discount rates are based on industry guidelines e.g. SAPOA, IPD as well as comparison to the listed sector property funds. Market rentals are based on the valuers assumptions and information they have based on similar valuations they have done our sourced from external brokers. The land per m² and bulk per m² are based on comparable sales and zoning conditions. Discount rates are based on industry guidelines predominantly from SAPOA and IPD as well as comparison to listed property funds in South Africa. Office Capitalisation rates: 9.25% to 11.0% Discount rates: 15.25% to 16.5% Market rentals: R50 to R140 per m² Vacancy rates: 0% to 100% Retail Capitalisation rates: 8.0% to 11.0% Discount rates: 13.5% to 17% Market rentals: R10 to R4000 per m² Vacancy rates: 0% to 16% Land Land per m2: R175 to R3 800 Owneroccupied property Equipment Total Carrying amount at beginning of the year Additions Revaluation Disposals (694) (67) (761) Depreciation (39) (117) (156) Carrying amount at end of the year Cost or valuation Accumulated depreciation - (384) (384) Carrying amount at end of the year

48 14. Property, plant and equipment (continued) Owneroccupied property Equipment Total Carrying amount at beginning of the year Additions Revaluation Disposals - (66) (66) Depreciation (50) (87) (137) Transfer to investment property (123) - (123) Carrying amount at end of the year Cost or valuation Accumulated depreciation - (331) (331) Carrying amount at end of the year The company engages Old Mutual Property (Pty) Ltd to determine the carrying value of its owner-occupied property. Fair value is determined by reference to market-based evidence. The valuations are carried out at intervals throughout the year by internal valuers and every three years by external valuers. A fixed asset register is available for inspection at the company's registered office. Refer note 13 for information regarding valuation techniques used in the determination of fair values for owneroccupied property. The carrying value that would have been recognised had owner-occupied property been carried under the cost model would be R2 223 million (: R2 568 million). 15. Deferred tax Deferred tax asset Investment contracts Income tax losses Other Deferred tax liability Other (214) (192) Captial gains tax - shareholders (2 818) (2 188) Capital gains tax - policyholders (1 594) (1 328) (4 626) (3 708) 47

49 15. Deferred tax (continued) Reconciliation of net deferred tax liability Rm At beginning of the year (2 371) (92) Income statement charge (1 134) (2 239) Charged to other comprehensive income (50) (40) At end of the year (3 555) (2 371) 16. Reinsurance contracts Insurance contracts Outstanding claims Insurance contracts At beginning of the year Inflows Outward reinsurance premiums Outflows Reinsurance recoveries (914) (793) Decrease in reinsurers' share of policyholder liabilities (515) (243) At end of the year Deferred acquisition costs At beginning of the year Acquisition cost deferred on inward business Transfer to investment contract liabilities (279) - Amortisation (254) (235) At end of the year Loans and advances Policyholder loans The effective interest earned on policyholder loans changed twice in due to the changes in the prime rate. It increased to 11% on the 1st of March and again to 11.25% on 1st of August. (: 10.5% throughout the course of the year). As at 31 December and, there were no overdue loans and advances and no impairment provision made against any amounts. The fair value of policyholder loans approximates their carrying value. 48

50 19. Investments and securities Analysis of investments Investments in group undertakings Nedbank Group Ltd Subsidiaries and joint ventures Capital advances to group undertakings Old Mutual plc Other financial assets Government securities Equity securities Other debt securities Pooled investments Reinsurance of investment contract liabilities Short-term funds The company conducts securities lending activities as a lender in respect of some of its listed equities and bonds. The fair value of collateral accepted as security for securities lending arrangements amounts to R million (: R million). As no transfer of ownership has taken place, any collateral accepted for securities lending arrangements may not be used for any purpose other than being held as security for the arrangements. Other debt securities include credit linked notes of R3 997 million (: R3 976 million). Credit linked notes are made up of a deposit and a credit default swap. A credit default swap is a derivative instrument and this has not been seperated out from the host contract as the entire contract is carried at fair value. The credit default swap component of the overall balance is insignificant. A register of investments is available for inspection at the company's registered office. Analysis of capital advances to group undertakings Old Mutual Portfolio Holdings (Pty) Ltd Old Mutual Group Holdings (SA) (Pty) Ltd Old Mutual (South Africa) Broad-based Employee Share Trust - 33 Old Mutual (South Africa) Management Incentive Trust Old Mutual Capital Holding (Pty) Ltd Capital advances are unsecured, interest free and have no fixed terms of repayment

51 20. Interest in principal subsidiaries, joint ventures and associates Number of issued ordinary shares % interest Carrying value Loans to subsidiaries Unlisted - joint venture Old Mutual Goudian Life Insurance - 50 % Company Ltd Unlisted - subsidiaries Old Mutual Technology Holdings Ltd % - - Rodina Investments (Pty) Ltd % Community Property Holdings (Pty) Ltd* % Old Mutual Alternative Solutions Ltd** % Old Mutual Health Insurance Ltd % 94 1 Agility Broker Services (Pty) Ltd % 15 - Old Mutual Alternative Risk Transfer Ltd % 35 3 South Africa Celestis Brokers Services % - 44 (Pty) Ltd Old Mutual Wealth (Pty) Ltd % K (Pty) Ltd* % Number of issued ordinary shares % interest Carrying value Loans to/(from) subsidiaries Unlisted - joint venture Old Mutual Goudian Life Insurance - 50 % Company Ltd Unlisted - subsidiaries Old Mutual Technology Holdings Ltd % - - Rodina Investments (Pty) Ltd % 634 (4) Community Property Holdings (Pty) Ltd* % MS Life Assurance Company Ltd % Old Mutual Health Insurance Ltd % 93 1 Agility Broker Services (Pty) Ltd % 14 - Old Mutual Alternative Risk Transfer Ltd % 26 4 South Africa Celestis Brokers Services % - 21 (Pty) Ltd Old Mutual Wealth (Pty) Ltd % K (Pty) Ltd* % All the company's subsidiaries and joint ventures at year end are South African entities except Old Mutual Goudian Life Insurance Company Ltd which is incorporated in China. * Community Property Holdings (Pty) Ltd and K (Pty) Ltd are property loan stock companies. The company invests in its linked units comprising of part share and part debenture. ** During MS Life Assurance Company Ltd changed its name to Old Mutual Alternative Solutions Ltd. 50

52 21. Derivative assets and liabilities The company utlises derivative instruments to enhance the risk-return profile of policyholder and shareholder funds. Interest rate, equity and exchange traded derivatives are contractual obligations to receive or pay a net amount based on changes in underlying interest rates, equity prices or indices or a financial instrument price on a future date at a specified price established in an organised financial market (an exchange). Since futures contracts are collateralised by cash or marketable securities and changes in the futures contract value are settled daily with the exchange, the credit risk is low. Forward rate agreements are individually negotiated interest rate contracts that call for a cash settlement at a future date for the difference between a contracted rate of interest and the current market rate, based on a notional principal amount. Interest rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an economic exchange of interest rates. The risk is monitored continuously with reference to the current fair value, the notional amount of the contracts and the liquidity of the market. To control the level of credit risk taken, the company assesses counterparties using the same techniques as for its lending activities. Equity options or equity index options, are contractual agreements under which the writer grants the holder the right but not the obligation, either to buy (a call option) or sell (a put option) at or by a set date or during a set period, a specific amount of a financial instrument or amount of assets determined by reference to an index at a predetermined price. In consideration for the assumption of interest rate or asset price risk, the seller receives a premium from the purchaser. Options may be either exchange-traded or negotiated between the company and a customer (over-thecounter). The company is exposed to credit risk on purchased options only, and only to the extent of their carrying amount, which is their fair value. The following table provides detail of the fair values of the company's derivative financial instruments outstanding at the end of the year. These instruments allow the company and its customers to transfer, modify or reduce their credit, equity market, foreign exchange and interest rate risks. The company undertakes transactions involving derivative financial instruments with other financial institutions. The company has established limits commensurate with the credit quality of the institutions with which it deals, and manages the resulting exposures such that a default by any individual counterparty is unlikely to have a materially adverse impact on the company. Fair values Fair value Assets Liabilities Assets Liabilities Equity derivatives Interest rate swaps Other derivatives Notional principal 51

53 22. Amounts due (to)/from group companies Subsidiaries Rodina Investments (Pty) Ltd 335 (4) Old Mutual Health Insurance Ltd 1 1 Old Mutual Alternative Risk Transfer Ltd 3 4 South Africa Celestis Brokers Services (Pty) Ltd K (Pty) Ltd Old Mutual Investment Services (Pty) Ltd Old Mutual Unit Trust Managers (RF) (Pty) Ltd Holding companies Old Mutual Emerging Markets Ltd (238) (310) Old Mutual Group Holdings (SA) (Pty) Ltd Old Mutual plc 13 (182) Old Mutual plc - subordinated loan (76) (74) The Old Mutual plc subordinated loan of 4.25 million (: 4.25 million) is unsecured, interest free and may be repaid subject to one day's notice once all the conditions of the subordination agreement have been met. Fellow subsidiaries Old Mutual Property (Pty) Ltd Old Mutual (South Africa) Foundation Old Mutual (Africa) Holdings (Pty) Ltd Old Mutual Capital Holding (Pty) Ltd Old Mutual International (Guernsey) Ltd Old Mutual Investment Group (Pty) Ltd (27) (10) Royal Skandia Life Assurance Ltd (21) Old Mutual (South Africa) Share Trust (37) (91) Old Mutual (South Africa) Dividend Access Trust (515) (456) Old Mutual Investment Administrators (Pty) Ltd 32 (36) Old Mutual Specialised Finance (Pty) Ltd (439) (234) Other (155) Old Mutual International (Guernsey) Ltd - subordinated loan (27) (26) (181) 52

54 22. Amounts due (to)/from group companies (continued) The subordinated loan from Old Mutual International (Guernsey) Ltd is unsecured, interest free and may be repaid subject to one day's notice once all the conditions of the subordination agreement have been met. During the year under review, a reinsurance agreement with a fellow subsidiary, Royal Skandia Life Assurance Ltd, was cancelled. The transfer of the related investments is in progress and the balances are therefore included in amounts owed by group companies in. All other amounts due by or to group companies above are unsecured, interest free and are not subject to fixed terms of repayment. The carrying values of the amounts due by or to group companies approximate their fair values. Loans due by group companies Loans due to group companies (1 397) (1 390) Other assets Accrued interest on cash collateral Other accrued interest and rent Outstanding settlements Other The carrying value of other assets approximates fair value. 24. Cash and cash equivalents Bank balances Collateral held The carrying value of cash and cash equivalents approximates fair value The effective interest rate on short-term bank deposits ranged from 1.5% to 4.1% (: 1% to 3.4%) and the deposits had an average maturity of between 32 and 90 days (: 32 and 90 days). 53

55 25. Policyholder liabilities Insurance contracts Outstanding claims Future policyholders' benefits Investment contracts Liabilities at fair value through profit or loss Liabilities with a discretionary participating feature Movement in future policyholders' benefits for insurance contracts Balance at beginning of the year Inflows Premium income Investment income (net of investment losses) Outflows Claims and policy benefits (26 637) (26 030) Operating expenses (7 281) (6 414) Other charges and other transfers (264) (834) Tax 6 (110) Transfer to operating profit (5 022) (3 882) Balance at end of the year The material assumptions used in determining the provisions for insurance contracts are detailed in note 41. Investment contract liabilities at fair value through profit or loss Balance at beginning of the year Additions New contributions received Withdrawals (32 974) (27 055) Fair value movements, net of tax Foreign currency translation Fees deducted (2 746) (2 737) Transfer from deferred acquisition costs (279) - Balance at end of the year

56 25. Policyholder liabilities (continued) Liabilities with a discretionary participation feature Balance at beginning of the year Inflows Premium income Investment income (net of investment losses) Outflows Claims and policy benefits (14 857) (12 342) Operating expenses (1 154) (2 118) Other charges and other transfers (1 277) (21) Tax (121) (156) Transfer to operating profit (860) (1 176) Balance at end of the year Borrowed funds Fixed and variable rate unsecured subordinated callable notes The fair value of the unsecured subordinated callable notes is R4 031 million (: R3 128 million). The subordinated notes rank behind the claims from policyholders and other unsecured unsubordinated creditors. On 27 October 2005 the company issued 8.92% Unsecured Subordinated Callable Notes at an aggregate nominal price of R3 billion. The notes are listed on the Bond Exchange of South Africa (BESA). The final maturity date for the notes is 27 October 2020, however they may be redeemed earlier by the company on 27 October 2015 or on each interest date thereafter. Interest is payable on 27 April and 27 October up to the call date, thereafter on 27 January, 27 April, 27 July and 27 October through to final maturity or date of early redemption, whichever is earlier. Interest is payable at 8.92% up to the date of early redemption and at the 3-month JIBAR rate plus 159 basis points there after. On the 27 November the company issued R1 billion unsecured subordinated notes. These bonds are split between R300 million fixed rate notes and R700 million floating rate notes. The notes are listed on the BESA. These notes have a 10 year maturity period that expire on the 27 November 2024, however, they are callable after 5 years. The first call date is the 27 November The interest for the fixed rate notes is payable at 9.26% and the interest on the floating rate notes is payable at the 3- month JIBAR rate plus 220 basis points which equates to 8.28% at year end. Interest relating to the year under review amounted to R276 million (: R268 million). The company is authorised to issue notes up to a par value of R10 billion. 55

57 27. Post employment benefits Defined benefit plan The company provides pension benefits to permanent employees and post-retirement benefits to qualifying employees. Pension benefits have been designed and are administered in accordance with the Pension Funds Act, 1956 as amended, and include both defined contribution and defined benefit schemes. The assets of these schemes are held in separate trustee administered funds. Pension costs and contributions relating to defined benefit schemes are assessed in accordance with the advice of qualified actuaries. Actuarial advice confirms that the current level of contributions together with existing assets, are adequate to secure members' benefits over the remaining service lives of participating employees. The schemes are reviewed at least on a tri-annual basis. In the intervening years a qualified actuary reviews the continuing appropriateness of the assumptions applied. The actuarial assumptions used to calculate the defined benefit obligations of the company's defined benefit scheme vary according to the economic conditions. Movement in defined benefit obligations Obligations Defined pension benefits Postretirement benefits Defined pension benefits Postretirement benefits At beginning of the year Current service cost Interest cost on benefit obligation Actuarial gains arising from - demographic assumptions experience adjustment (34) (53) (16) (104) Benefits paid (2) (40) (2) (42) At end of the year Net asset or (liability) recognised in balance sheet Plan assets Defined pension benefits Postretirement benefits Defined pension benefits Postretirement benefits At beginning of the year Expected (loss)/return on plan assets (2) 122 (3) 104 Benefits paid (2) (40) (2) (41) Net actuarial (loss)/gains (14) At end of the year (170) Net asset or (liability) recognised in balance sheet Net asset Defined pension benefits Postretirement benefits Defined pension benefits Postretirement benefits Funded status of plans

58 27. Post employment benefits (continued) (Income)/expense recognised in income statement Defined pension benefits Postretirement benefits Defined pension benefits Postretirement benefits Current service cost Interest cost (3) (23) (3) (18) Total - (2) - 5 Plan asset allocation Principal actuarial assumptions Defined pension benefits Postretirement Defined Post- pension retirement benefits benefits benefits Discount rates used 9 % 9 % 9 % 9 % Expected return on plan assets 9 % 9 % 9 % 9 % Future salary increases 6 % 8 % 8 % 8 % Price inflation 8 % 8 % 8 % 8 % Plan asset allocation Defined pension benefits Postretirement Defined Post- pension retirement benefits benefits benefits Equity securities 57 % 54 % 58 % 54 % Debt securities 25 % 28 % 25 % 33 % Real estate 6 % 7 % 8 % 7 % Other investments 12 % 11 % 9 % 6 % Post retirement benefits Sensitivities Assumption Change in assumption Impact on scheme liabilities Inflation rate Decrease by 1.0% Decrease Increase by 1.0% Increase The company contributes to the following post-employment defined benefit plans in South Africa: The defined pension benefits plan entitles a retired employee to receive a monthly pension payment, equal to 2% of final salary for each year of service that the employee provided. The post-retirement benefits plan provides for a flat amount of subsidy towards the medical aid contributions for employees in retirement, provided they were employed prior to The defined pension benefits plan is administered as a pension fund in South Africa that is legally separated from the company. The Fund has been transferred to an Umbrella arrangement, subject to the approval of the legislative authorities. Employee and Employer representatives are part of the Member Management Committee. Both the board and the Management Committee are responsible for setting certain policies (eg. contribution rates; benefits and investments) and the implementation of such policies. 57

59 27. Post employment benefits (continued) These defined benefit plans expose the company to actuarial risks, such as longevity risk and investment risk. The company has taken an appropriate insurance policy to provide for the benefits in the post-retirement benefits plan. The assets of the plans are invested in insurance policies and related investment policies held by the insurers. Funding Both plans are fully funded. The funding requirements are based on the fund's actuarial measurement framework set out in the funding policies of the plans. The funding of the defined pension benefits plan is based on a separate actuarial valuation for funding purposes for which the assumptions may differ from the assumptions set out. Employees are required to contribute to the defined pension benefits plan. The company has determined that, in accordance with the terms and conditions of the defined benefit plans, and in accordance with statutory requirements (including minimum funding requirements for the defined pension benefits plan) for the plans of the respective jurisdictions, the present value of refunds or reductions in future contributions is not lower than the balance of the total fair value of the plan assets less the total present value of obligations. This determination has been made on a plan-by-plan basis. As such, no decrease in the defined benefit asset was necessary at 31 December or 31 December. 58

60 28. Other employment benefits The company provides disability benefits to permanent employees. The disability benefit scheme is administered by Old Mutual Alternative Risk Transfer Ltd, a subsidiary. The costs and contributions relating to the scheme are assessed in accordance with the advice of qualified actuaries. The scheme is reviewed at least on an annual basis. The actuarial assumptions used to calculate the benefit obligations of the scheme vary according to the economic conditions. Benefit obligation At beginning of the year Current service cost Net actuarial losses Benefits paid (23) (22) At end of the year Assets At beginning of year Contributions Investment returns (6) (3) At end of the year Expense recognised in income statement and other comprehensive income Current service cost Other long-term employee benefits Total (included in staff costs) Principal actuarial assumptions Discount rate 8 % 8 % Expected return on assets 8 % 8 % Future salary increases 8 % 8 % Price inflation 8 % 8 % Net benefit obligation Assets Benefit obligation (271) (245)

61 28. Other employment benefits (continued) The benefit obligation of R271 million at the end of the year (: R245 million) is supported by non-segregated managed assets amounting to R143 million (: R132 million) as part of the pool of policyholder funds. The company also has a reimbursive right of R128 million (: R112 million) relating to the disability benefit obligation through an insurance policy with Old Mutual Alternative Risk Transfer Ltd. 29. Share-based payment liabilities The company has employee compensation plans for all eligible employees. The Old Mutual plc Group Share Incentive Scheme implemented during 1999 and various senior employees share schemes implemented as part of the Old Mutual Black Economic Empowerment transaction in 2005, offer eligible employees of the company the right to acquire Old Mutual plc shares (plc shares) or a cash equivalent. The right to acquire plc shares or a cash equivalent vests depending on the type of plan under which the employee participates. Composition of share-based payment liabilities Share options Restricted share awards Share options Number of share options (Millions) Weighted average exercise price (Rand) Number of share options (Millions) Weighted average exercise price (Rand) Outstanding at beginning of the year 14 14, ,92 Transfers to other group companies (1) 14, Forfeited during the year - - (1) 14,86 Exercised during the year (9) 15,07 (10) 13,16 Outstanding at end of the year 4 13, ,49 Exercisable at end of the year 4 13, ,12 Share options vest subject to the fulfilment of service conditions and escalating exercise prices or performance targets as prescribed by the Remuneration Committee of Old Mutual plc. The options outstanding at the end of the year vest over periods between 3 to 6 years from the date of grant. Restricted share awards Number of awards (Millions) Number of awards (Millions) Outstanding at beginning of the year Transfer to other group companies (4) - Granted during the year 8 12 Forfeited during the year (2) (2) Exercised during the year (10) (11) Outstanding at end of the year

62 29. Share-based payment liabilities (continued) Restricted share awards are offered as an alternative to share options under the Share Option and Deferred Delivery plan or to senior management in terms of the Deferred Short Term Incentive Plan. Restricted share awards are also offered to eligible senior management in terms of the Senior Black Management Plan. They vest subject to the fulfillment of a specified period of employment and have a zero exercise price. The restricted share awards outstanding at the end of the year vest after 3 years from the date of the grant in terms of the Deferred Short Term Incentive Plan. Restricted share awards granted in terms of the Senior Black Management Plan vest in three equal tranches 4; 5 and 6 years from grant date. The fair value of services received in return for share options is measured by reference to the fair value of share entitlements granted. Fair value is measured using the Black Scholes option pricing model. Options are granted conditional on service and non-market based performance criteria. These conditions are taken into account in determining the estimated value of the ultimate liability to the company. There are no market conditions associated with the share entitlements. The significant pricing inputs used in the valuation of the share-based payment liability are as follows: Fair value per option at measurement date (in Rands) - highest 27,04 24,47 Fair value per option at measurement date (in Rands) - lowest 19,02 17,58 Share price (in Rands) 34,70 32,79 Exercise price (in Rands) - highest 15,80 15,80 Exercise price (in Rands) - lowest 7,45 7,45 Expected volatility 44 % 44 % Expected life (in years) 1 3 Expected dividend yield 3,50 % 3,50 % Risk free interest rate 6,70 % 6,74 % The expected volatility is based on the annualised historic volatility of the share price over a period commensurate with the expected life of the grant. The expected life assumption is based on the average length of time that similar grants have remained outstanding in the past and the behaviour patterns of the relevant employee groups. Restricted share awards Number granted (millions) 8 12 Value of restricted shares awards (Rand millions) Fair value per share (in Rands) 34,70 32,79 The share price at measurement date is used to determine the fair value of the restricted share. Expected dividends were not incorporated into the measurement of fair value where the holder of the restricted share is entitled to dividends throughout the vesting period. 61

63 30. Provisions Reconciliation of provisions - Administration and legal claims Charitable donations Provision for enhanced benefits Provision for clawback of prescribed claims Other provisions Total Opening balance Transfer from other liabilities Utilised during the year (16) (98) - (44) (15) (173) Investment return and repayments Charge Administration and legal claims Charitable donations Provision for enhanced benefits Total Opening balance Utilised during the year (54) (80) - (134) Investment return and repayments Charge Administration and legal claims The provisions relate to costs arising from administration related and legal claims. The timing of resolution of these claims is uncertain and it is expected that most of this provision will be utilised over a number of years from the reporting date. Charitable donations and other This provision relates to obligations of the company in connection with the closure of the Old Mutual South Africa Unclaimed Shares Trust in An agreement was entered into in 2006 in terms of which the company will provide donations to the Masisizane Fund, which has been set up as a charitable organisation for the enhancement of good causes. Provision for enhanced benefits This provision is held in respect of obligations which have arisen as a result of changes in legislation and updated interpretations of existing legislation impacting the life insurance industry. Provision for claw-back of prescribed claims This provision is held to allow for the possible future payment of claims that have been previously reversed. Due to the nature of the provision, the timing of the expected cash outflows are uncertain. Estimates are reviewed annually and adjusted, as appropriate, for new circumstances. Other provisions Other provisions include provisions for variable pay and restructuring. 62

64 31. Deferred revenue on investment contracts Balance at beginning of the year Fees and commission income deferred 4 18 Amortisation (27) (36) At end of the year Other liabilities Collateral owing Amounts owed to policyholders Amounts owed to intermediaries Accruals Outstanding settlements Other The carrying value of other liabilities approximates fair value. 33. Share capital and premium Authorised share capital ordinary shares of R1 each redeemable preference shares of R1 each Issued share capital and premium ordinary shares of R1 each redeemable preference share of R1 - - Share premium Subject to the restrictions imposed by the Companies Act, as amended, the unissued shares are under the control of the directors, until the forthcoming annual general meeting. The preference shares may be redeemed by the company by giving 30 days written notice to the holder. The preference shareholder has the right to receive a dividend of R100 per share or an additional amount at the discretion of the company's directors. The preference shareholder has full voting rights. 63

65 33. Share capital and premium (continued) Other reserves comprise: Property revaluation reserve Currency translation reserve Cash used in operations Profit before tax Adjustments for non-cash movements included in profit Depreciation and amortisation Dividend income (4 892) (5 077) Interest income (14 911) (13 217) Finance costs Net fair value gains (44 491) (51 887) Movements in policyholder liabilities Movement in share-based payment liability (301) 183 Changes to provisions and post employment benefits obilgation Adjustments for non-cash movement included in the statement of financial position Investments and securities (20 174) - Amounts due from group companies Changes in working capital Deferred acquisition costs 160 (81) Deferred revenue on investment contracts (23) (18) Loans and advances Other assets (115) Other liabilities Reinsurance contracts Net movement in loans to/from group companies (485) (1 168) 35. Tax paid (8 397) (4 456) Balance payable at beginning of the year (2 011) (2 576) Current tax expense (1 860) (1 726) Balance payable at end of the year (2 127) (2 291) 64

66 36. Dividends paid Dividends paid excluding dividends in specie (3 510) (3 878) 37. Operating lease receivables Total future minimum lease receivables under operating leases Within one year In second to fifth year inclusive Later than five years The future minimum operating lease receivables do not take into account the asset swap as disclosed in note 13, as this is still subject to competition authority approval. Investment property comprises a portfolio of retail, commercial and industrial properties that are leased to third parties. Each lease has a defined lease period and financial terms. Renewal negotiations with tenants commence prior to expiry of their current lease agreement. Lease periods vary and are dependent on the tenant and property type. No contingent rents are charged. 38. Related party disclosures The company's immediate holding company is Old Mutual Emerging Markets Ltd, incorporated in South Africa, which holds 100% of the company's ordinary shares. The ultimate holding company is Old Mutual plc, incorporated in the United Kingdom. The company's principal subsidiaries, joint ventures and associates, together with amounts due by or to them, are listed in notes 19 and 20. Other group companies consist of fellow subsidiaries and associates. Holding company Fellow subsidiaries Subsidiaries Associates Income statement Interest income Dividend income Fee income/(expense) - (449) Insurance contract premiums income/(expense) Reinsurance contract premiums income/(expense) Claims and policyholder benefits income/(expense) Statement of financial position Cash and short-term securities Zero coupon bonds held Credit linked notes including interest Call loans including interest - (4 854) - - Bonds including interest Statement of changes in equity Dividend expense (3 510)

67 38. Related party disclosures (continued) Holding company Fellow subsidiaries Subsidiaries Associates Income statement Interest income/(expense) Dividend income Fair value gains/(losses) Fee income/(expense) Insurance contract premiums income/(expense) Reinsurance contract premiums income/(expense) Claims and policyholder benefits income/(expense) Statement of financial position Cash and short-term securities Zero coupon bonds held Credit linked notes including interest Call loans including interest - (55) - - Bonds including interest Reinsurance of investment contract liabilities Statement of changes in equity Dividend expense (27 151) Loans due by or to subsidiaries or other group companies are interest free and generally have no fixed terms of repayment. At 31 December government and corporate bonds with a fair value of R6 448 million (: R million) including interest had been lent to Old Mutual Specialised Finance (Pty) Ltd. R5 090 million (: R3 538 million) of these securities borrowed had been sold under repurchase agreements, R903 million (: R443 million) sold short and R456 million (: R283 million) was used as collateral against scrip lending positions. The bonds used to settle short selling have not been recognised as financial assets by the company. The nominal value of bonds borrowed was R5 872 million (: R4 204 million). The bonds borrowed had a weighted average coupon rate of 7.40% (: 8.06%). At 31 December equities with a fair value of R4 074 million (: R2 449 million) had been lent to Old Mutual Specialised Finance (Pty) Ltd. Included in note 32 is R6 402 million (: R6 964 million) collateral owing to Old Mutual Specialised Finance (Pty) Ltd. 66

68 38. Related party disclosures (continued) Directors' emoluments R'000 Fees Salary Bonus Share-based payment charge Retirement and other benefits Total R T Mupita K Murray B M Rapiya P C Baloyi P G de Beyer A A Maule N T Moholi C W N Molope C E Maynard F Robertson G T Serobe P G M Truyens G S van Niekerk R'000 Fees Salary Bonus Share-based payment charge Retirement and other benefits Total R T Mupita K Murray B M Rapiya P C Baloyi P G de Beyer I A Goldin A A Maule N T Moholi C W N Molope C E Maynard F Robertson G T Serobe A H Trikamjee P G M Truyens G S van Niekerk

69 38. Related party disclosures (continued) The variable pay for Ms K Murray, Mr R T Mupita and Mr B M Rapiya for is made up of an award of restricted shares of 50% and a cash component of 50%. The bonus disclosed is the cash component of the variable pay. The restricted share awards granted as part of the incentive arrangements, are retained until the third anniversary of the award date provided the directors remain employed by the Company until the third anniversary of the award date. There are no corporate performance targets applicable to these restricted shares and share options. 39. Financial risk management The company is exposed to financial risk through its financial assets, financial liabilities (investment contracts, customer deposits and borrowings), reinsurance assets and insurance liabilities. In particular the key financial risk is that the proceeds from its financial assets are not sufficient to fund the obligations arising from its insurance and investment contracts. The most important components of financial risk are credit risk, market risk and liquidity risk. These risks arise from open positions in interest rate (both fair value and cash flow interest rate risk), currency and equity products, all of which are exposed to general and specific market movements. Financial risk management strategy and policy The company manages these positions within an asset liability management (ALM) framework that has been developed to achieve long-term investment returns in excess of its obligations under insurance and investment contracts. The principal technique of the company's ALM framework is to match assets to the liabilities arising from insurance and investment contracts by reference to the type of benefits payable to policyholders, as well as seeking to maximise the return on shareholders' funds, all within an acceptable risk framework. For each distinct category of liabilities, a separate portfolio of assets is maintained. The insurance contracts retain substantial exposures to the extent that the benefits payable to policyholders are not linked to the performance of the underlying assets and/or policyholders enjoy options embedded in their contracts which are not matched by identical options in the underlying investments. These exposures include duration risk, credit risk and market risk. The notes below explain how financial risks are managed using the categories utilised in the ALM framework. Note 40 explains in more detail how insurance risk is managed. Capital adequacy The Financial Services Board imposes certain capital requirements on the company. The company has met all these requirements at all times during the year. The capital position of the company is set out in the Statutory actuary's report on page 7. The company has adopted the following capital management policies: Maintenance, as a minimum, of capital sufficient to meet the statutory requirement. The business has been managed on an internal CAR basis which is higher than the statutory CAR. An economic capital at risk (ECaR) approach is also used by management and the board to ensure that obligations to policyholders can be met in adverse circumstances. ECaR is calculated using an internal capital model applying shocks that should only be exceeded once in 200 years. However, as the total of the current statutory reserves and internal CAR is more onerous than the total of technical provisions calculated on the economic basis and ECaR (calculated as per approach above) the company will continue to hold capital on the more onerous internal CAR basis. Maintenance of an appropriate level of liquidity at all times. The company further ensures that it can meet its expected capital and financing needs at all times, having regard to business plans, forecasts and any strategic initiatives. 68

70 39. Financial risk management (continued) Sensitivities The company has both qualitative and quantitative risk management procedures to monitor the key risks and sensitivities of the business. This is achieved through stress tests, scenario analyses and risk assessments. From an understanding of the principal risks, appropriate risk limits and controls are defined. The risk types affecting the surplus capital of the company are market risk, credit risk, liquidity risk, underwriting risk, business risk and operational risk. For further details of the management of specific financial risks, refer to the relevant sections of this note. Sensitivity tests The table below shows the sensitivity of the company's embedded value to changes in key assumptions. Embedded value is a measure of the value of shareholders' interests in the covered business of the company after sufficient allowance has been made for the aggregate risks in the covered business. It is measured in a way that is consistent with the value that would normally be placed on the cashflows generated by these assets and liabilities in a deep and liquid market. All calculations include the impact on the time-value reserves necessary for policyholder financial options and guarantees. For each sensitivity illustrated, all other assumptions have been left unchanged. At 31 December Embedded value Embedded value Effect of: Required capital equal to the minimum statutory requirement 477 Increasing all pre-tax investment and economic assumptions by 1 per cent with bonus (407) rates and discount rates changing commensurately Decreasing all pre-tax investment and economic assumptions by 1 per cent with bonus 345 rates and discount rates changing commensurately Equity and property market values increasing by 10 per cent, with all pre-tax investment and economic assumptions unchanged Equity and property market values decreasing by 10 per cent, with all pre-tax investment (4 219) and economic assumptions unchanged 50 bps contraction on corporate bond spreads per cent increase in equity and property implied volatilities (e.g. 10 to 12.5 per cent) (1 123) 25 per cent increase in swaption implied volatilities (e.g. 5 to 6.25 per cent) (8) Voluntary discontinuance rates decreasing by 10 per cent Maintenance expense levels decreasing by 10 per cent with no corresponding increase in policy charges Mortality and morbidity assumptions for assurances decreasing by 5 per cent with no corresponding increase in policy charges Mortality assumption for annuities decreasing by 5 per cent with no corresponding (46) increase in policy charges* For value of new business, acquisition expenses other than commission and commission (128) related expenses increasing by 10 per cent, with no corresponding increase in policy charges 69

71 39. Financial risk management (continued) At 31 December Embedded value Embedded value Effect of: Required capital equal to the minimum statutory requirement 705 Increasing all pre-tax investment and economic assumptions by 1 per cent with bonus (726) rates and discount rates changing commensurately Decreasing all pre-tax investment and economic assumptions by 1 per cent with bonus 552 rates and discount rates changing commensurately Equity and property market values increasing by 10 per cent, with all pre-tax investment and economic assumptions unchanged Equity and property market values decreasing by 10 per cent, with all pre-tax investment (3 428) and economic assumptions unchanged 50 bps contraction on corporate bond spreads per cent increase in equity and property implied volatilities (e.g. 10 to 12.5 per cent) (1 185) 25 per cent increase in swaption implied volatilities (e.g. 5 to 6.25 per cent) (210) Voluntary discontinuance rates decreasing by 10 per cent 949 Maintenance expense levels decreasing by 10 per cent with no corresponding increase in policy charges Mortality and morbidity assumptions for assurances decreasing by 5 per cent with no corresponding increase in policy charges Mortality assumption for annuities decreasing by 5 per cent with no corresponding increase (57) in policy charges* For value of new business, acquisition expenses other than commission and commission (131) related expenses increasing by 10 per cent, with no corresponding increase in policy charges * No impact on with-profit annuities as the mortality risk is borne by policyholders. Credit risk Credit risk is the risk of loss as a result of an asset against a counterparty not being repaid at the due and stipulated time. The company does not use reinsurance to manage significant credit risk. The company is exposed to credit risk through its investment holdings (i.e. debt securities) backing the policyholder liabilities and in shareholder funds. Credit risk is managed by placing limits on exposure to a single counterparty, or groups of counterparties, and to geographical and industry segments. Credit risk is monitored with reference to established credit rating agencies (where available) with limits placed on exposure to below investment grade holdings. 70

72 39. Financial risk management (continued) Overall credit risk Reinsurance contracts Loans and advances Investment and securities Government and non-government-guaranteed securities Other debt securities, preference shares and debentures Short-term funds and securities treated as investments Reinsurance Other assets Derivative assets Amounts due by group companies Cash and cash equivalents Debt instruments and similar securities The table below analyses end of the year values of debt and similar securities according to their credit rating (Standard and Poors or equivalent) by investment grade. Government and nongovernmentguaranteed securities Other debt securities, preference shares and debentures Short-term funds and securities treated as investments Total Investment grade (AAA to BBB) Not rated Sub-investment grade Government and nongovernmentguaranteed securities Other debt securities, preference shares and debentures Short-term funds and securities treated as investments Total Investment grade (AAA to BBB) Not rated Sub-investment grade Reinsurance assets The company's reinsurance assets are investment grade (AAA to BBB) rated. None are past due or impaired. The company's cash balances are mainly held with Nedbank Limited, which has a credit rating of BBB- (: AA). 71

73 39. Financial risk management (continued) Collateral obtained Below is an analysis of collateral taken as security by the company: Rm Rm Bonds Cash Total collateral Further detail on the company's security lending activities is contained in note 19. Market risk Market risk is the potential impact of unfavourable changes in foreign exchange rates, interest rates, prices and market volatilities on its financial position, financial performance and cash flows. Market risk arises from changes in the fair value of investments. The stock selection and investment analysis process is supported by a well-developed research function. For fixed annuities, market risks are managed by investing in fixed interest securities with a duration closely corresponding to those liabilities. Market risks on policies where the terms are guaranteed in advance and the investment risk is carried by the shareholders, principally reside in the South African guaranteed non-profit annuity book, which is predominantly matched with suitably dated interest-bearing assets. Other non-profit policies are also suitably matched through appropriate investment mandates. Market risks on with-profit policies, where investment risk is shared, are minimised by appropriate bonus declaration practices and by having suitable mandates for asset allocation that reflect the level of guarantees. Equity price risk and interest rate risk (on the value of the securities) are modelled by the company's risk-based capital practices. Currency risk The company has exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position, financial performance and cash flows. The company operates in Hong Kong, Guernsey and Isle of Man through branches which create an additional source of foreign currency risk which arises from the fact that the branches use GBP as their functional currency, whereas the functional currency of the company is Rands. 72

74 39. Financial risk management (continued) The table below summarises the company s exposure to foreign currency exchange rate risk. ZAR GBP USD Euro Other Total Assets Intangible assets Investment property Property and equipment Deferred tax assets Reinsurance contracts Deferred acquisition costs Loans and advances Investments and securities Derivative assets Other assets Cash and cash equivalents Amounts due by group companies Post employment benefit asset Non-current assets held-for-sale ZAR GBP USD Euro Other Total Liabilities Insurance contract liabilities Investment contract liabilities Borrowed funds Share-based payment liabilities Deferred revenue on investment contracts Deferred tax liabilities Derivative liabilities Amounts due to group companies Provisions Current tax payable Other liabilities Total liabilities A substantial portion of the policyholder liabilities will be settled in Rand, but are linked to assets denominated in other currencies. 73

75 39. Financial risk management (continued) ZAR GBP USD Euro Other Total Assets Intangible assets Investment property Property and equipment Deferred tax assets Reinsurance contracts Deferred acquisition costs Loans and advances Investments and securities Derivative assets Other assets Cash and cash equivalents Amounts due by group companies Post employment benefits asset Total assets ZAR GBP USD Euro Other Total Liabilities Insurance contract Investment contract Borrowed funds Share-based payment liabilities Deferred revenue on investment contracts Deferred tax liabilities Derivative liabilities Amounts due to group companies Provisions Current tax payable Other liabilities Total liabilities Interest rate risk Interest rate risk is the risk that fluctuating interest rates will unfavourably affect the company s earnings and the value of its assets, liabilities and capital. The company has due regard to the nature of the liabilities and guarantees given to policyholders. The interest rate risk of such liabilities is managed by investing in assets of similar duration. For products that have a durational mismatch between premium inflows and benefit and expense outflows, mainly pure risk products, matching of assets and liabilities is complex and earnings are exposed to interest rate movements. Hedging strategies and a discretionary margin are now in place to partially hedge this exposure to interest rate movements. Investment guarantee reserves calculated on a market-consistent basis are very sensitive to movements in interest rates as well as the implied volatility of interest rates, with a reduction in interest rates or an increase in implied interest rate volatility increasing the reserves held. Hedging is largely in place to mitigate the impact of interest rate movements. A discretionary margin is also held for the potential ineffectiveness of such hedging strategies and for the movements in implied volatilities which are not currently hedged. 74

76 39. Financial risk management (continued) Liquidity risk Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. The company's executive committee is responsible for the effective management of liquidity risk by putting the appropriate structure and processes in place. The Risk Committee of the board is responsible for reviewing the adequacy and effectiveness thereof. The table below is a maturity analysis of liability cashflows based on contractual maturity dates for investment contract liabilities and discretionary participating financial instruments, and expected maturity dates for insurance contracts. For other items the amounts included in the maturity table are the gross, undiscounted cash flows. Less than 3 months Between 3 months and 1 year Between 1 and 5 years Over 5 years Insurance contracts Investment contracts Unit-linked investment contracts and similar contracts Investment contracts with discretionary participating features Other investment contracts Outstanding claims Borrowed funds Derivative liabilities (46) Amounts due to group companies Less than 3 months Between 3 months and 1 year Between 1 and 5 years Over 5 years Insurance contracts Investment contracts Unit-linked investment contracts and similar contracts Investment contracts with discretionary participating features Other investment contracts Outstanding claims Borrowed funds Derivative liabilities (310) (789) Amounts due to group companies

77 39. Financial risk management (continued) The table below analyses assets and liabilities into current and non-current categories based on the remaining period at reporting date to settlement date, or if not subject to fixed terms of repayment, the intention as regards settlement period at the reporting date. Current assets Non-current assets Assets Intangible assets Investment property Property and equipment Deferred tax assets Reinsurance contracts Post employment benefits Deferred acquisition costs Loans and advances Investments and securities Derivative assets Amounts due by group companies Other assets Cash and cash equivalents Non-current assets held-for-sale Total assets Current liabilities Non-current liabilities Liabilities Insurance contracts Investment contracts Borrowed funds Share-based payment liabilities Deferred revenue on investment contracts Deferred tax liabilities Derivative liabilities Amounts due to group companies Provisions Current tax payable Other liabilities Total liabilities Total Total 76

78 39. Financial risk management (continued) At 31 December Current assets Non-current assets Assets Intangible assets Investment property Property and equipment Deferred tax assets Reinsurance contracts Deferred acquisition costs Deferred acquisition costs Loans and advances Investments and securities Derivative financial instruments - assets Amounts due by group companies Other assets Cash and cash equivalents Total assets Current liabilities Non-current liabilities Liabilities Insurance contracts Investment contracts Borrowed funds Share-based payment liabilities Deferred revenue on investment contracts Deferred tax liabilities Derivative liabilities Amounts due to group companies Provisions Current tax payable Other liabilities Total liabilities Designated financial assets The maximum exposure to credit risk for designated financial assets that would have otherwise been categorised as financial assets carried at amortised cost amounted to R million (: R million). The changes in fair value of these assets relating to any change in credit risk was insignificant. Total Total 77

79 40. Insurance risk management The company assumes insurance risk by issuing insurance contracts, under which the company agrees to compensate the policyholder or other beneficiary if a specified uncertain future event (the insured event) affecting the policyholder occurs. Insurance risk includes liability (mortality, morbidity and longevity) risk and business (expense and lapse) risk. For accounting purposes insurance risk is defined as risk other than financial risk. Contracts issued by the company may include both insurance and financial risk; contracts with significant insurance risk are classified as insurance contracts, while contracts with no or insignificant insurance risk are classified as investment contracts. The company s approach to financial risk management has been described in note 39. Risk management objectives and policies for mitigating insurance risk The company manages insurance risk through the following mechanisms: An agreed risk preference for all risk types, including those relating to insurance. The diversification of business over several classes of insurance and large numbers of uncorrelated individual risks, by which the company seeks to reduce variability in loss experience. The maintenance and use of management information systems, which provide current data on the risks to which the business is exposed and the quantification of such risks. Actuarial models, which use the above information to calculate premiums and monitor decrements and claims patterns. Past experience and statistical methods are used. Guidelines for concluding insurance contracts and assuming insurance risks. These include underwriting principles and product pricing procedures. Reinsurance, which is used to limit the company's exposure to large single claims and catastrophes. When selecting a reinsurer, consideration is given to those companies that provide high security using rating information from both public and private sources. The mix of assets, which is driven by the nature and term of the insurance liabilities. The management of assets and liabilities is closely monitored to ensure that there are sufficient interest bearing assets to match the guaranteed portion of liabilities. Hedging instruments are used at times to limit exposure to equity market and interest rate movements. Terms and conditions of insurance contracts The terms and conditions attaching to insurance contracts determine the level of insurance risk accepted by the company. The following tables outline the general form of terms and conditions that apply to contracts sold in each category of business, and the nature of the risk incurred. 78

80 40. Insurance risk management (continued) Category Essential terms Main risks Policyholder guarantees Retail Affluent Flexi business with cover Mortality / morbidity rates may be repriced Mortality, morbidity, investment Some investment performance, cover and annuity guarantees Policyholder participation in investment return Yes, varies - see below Conventional with cover Charges fixed at inception and cannot be changed Mortality, morbidity, investment Some investment performance and annuity guarantees Yes, varies - see below Greenlight Non-profit annuity Mass Foundation Cluster Funeral cover Corporate Segment Group Assurance Charges fixed at inception and cannot be changed for a specified term Regular benefit payments guaranteed in return for consideration Charges fixed at inception and cannot be changed for a specified number of years Rates are annually renewable Mortality, morbidity, expense Longevity, investment Mortality including HIV/AIDS, expense Mortality, morbidity Rates fixed for a specified number of years Benefit payment schedule is guaranteed Rates fixed for a specified number of years No significant guarantees except for permanent health insurance claims in payment for which benefit payment schedule is guaranteed None None None None With-profit annuity Non-profit annuity Regular benefit payments participating in profits in return for consideration Regular benefit payments guaranteed in return for consideration Investment Longevity, investment Underlying pricing interest rate is guaranteed. Declared bonuses cannot be reduced Benefit payment schedule is guaranteed Yes - see below None The extent of the company s discretion as to the allocation of investment return to policyholders varies based on the type of contract. Where the contracts are pure risk type, there is no sharing of investment returns. For other contracts, investment return is attributed to the policyholder. Declared bonuses may be either vesting and/or nonvesting (in which latter case they can be removed in adverse circumstances). Smoothed bonus products constitute a significant proportion of the business. Particular attention is paid to ensure that the declaration of bonuses is done in a responsible manner, such that sufficient reserves are retained for bonus smoothing purposes. Investment returns not distributed after deducting charges are credited to bonus stabilisation reserves, which are used to support future bonus declarations. In addition to the specified risks identified above, the company is subject to the risk that policyholders discontinue the insurance policy through lapse or surrender. Management of insurance risks The table below summarises the variety of insurance risks to which the company is exposed, and the methods by which it seeks to mitigate these risks. 79

81 40. Insurance risk management (continued) Risk type Nature of risk Risk management Liability - Mortality Liability - Mortality Liability - Longevity Market Business Liability - Mortality catastrophe Misalignment of policyholders to the appropriate pricing basis or impact of antiselection, resulting in a loss Impact of HIV/AIDS on mortality rates and critical illness cover Possible increase in annuity costs due to policyholders living longer Lower swap curves and higher volatilities cause investment guarantee reserves to increase Policyholder behaviour: selection of more expensive options, or lapse and re-entry when premium rates are falling or termination of policy, which may cause the sale of assets at inopportune times Natural and non-natural disasters could result in increased mortality risk and payouts on policies Experience is closely monitored. For universal life business, mortality rates can be reset. Underwriting limits, health requirements, spread of risks and training of underwriters all mitigate the risk. Impact of HIV/AIDS is mitigated wherever possible by writing products that allow for repricing on a regular basis or are priced to allow for the expected effects of AIDS. Tests for AIDS and other tests for lives insured above certain values are conducted. A negative test result is a prerequisite for acceptance at standard rates. For non-profit annuities, improvement to mortality is allowed for in pricing and valuation. Experience is closely monitored. For with-profit annuity business, the mortality risk is carried by policyholders and any mortality profit or loss is reflected in bonuses declared. A discretionary margin is added to the value of guarantees, determined on a market consistent stochastic basis and included in current reserves. Hedging is largely in place for most products. Fewer and lower guarantees are typically provided on new business. Experience is closely monitored, and policyholder behaviour is allowed for in pricing and valuation. Catastrophe excess of loss re-insurance treaty covers claims from one incident occurring within a specified period between a range of specified limits. Many of the above risks are concentrated by line of business (for example, longevity). The company, through diversification in the types of business it writes attempts to mitigate this concentration of risk. Changes in key assumptions used to value insurance contracts would result in increases or decreases to the insurance contract liabilities recorded, with corresponding decreases or increases to profit. For with-profit annuity business the effect of a change in mortality assumption is mitigated by the offset to the bonus stabilisation reserve. The increase or decrease to insurance contract liabilities, and hence the impact on profit and loss and equity, as at 31 December has been estimated as follows: Sensitivity analysis Assumption Change % Increase/ (decrease) in liabilities Increase/ (decrease) in liabilities Mortality and morbidity rates - assurance 10% Mortality rates - annuities -10% Discontinuance rates 10% (100) (102) Expenses (maintenance) 10%

82 40. Insurance risk management (continued) The insurance contract liabilities recorded for South African business are also impacted by the valuation discount rates assumed. Lowering this rate by 1% (with a corresponding reduction in the valuation inflation rate) would result in a net increase to insurance contract liabilities, and decrease to profit, of R39 million (: R 83 million). The impact is lower than the impact due to further management actions taken to reduce the impact of changing interest rates on operating profit. This impact is also calculated with no change to the charges paid by policyholders. It should be noted that where the assets and liabilities of a product are closely matched (e.g. non-profit annuity business) or where the impact of a lower valuation discount rate is hedged or partially hedged, the net effect has been shown since the assets movement fully or partially offsets the liability movement. Guarantees and options Many of the insurance contracts issued by the company contain guarantees and options, the ultimate liability for which will depend significantly on the number of policyholders exercising their options and on market and investment conditions applying at that time. Certain life assurance contracts include the payment of guaranteed values to policyholders on maturity, death, disability or survival. The published liabilities include the provision for both the intrinsic and time-value of the options and guarantees. The time-value of options and guarantees has been valued using a market-consistent stochastic asset model that is in keeping with the applicable professional guidance notes issued by the Actuarial Society of South Africa, APN 110 in particular. The options and guarantees that could have a material effect on the amount, timing and uncertainty of future cash flows are described below. Product category Retail Death, disability, point and/or maturity guarantees Description of options and guarantees A closed block of unit-linked type and smoothed bonus business with an underlying minimum growth rate guarantee (4.28% pa for life and endowment business and 4.78% pa for retirement annuity business), and smoothed bonus business with vested bonuses, applicable when calculating death, disability and maturity claims. A small block of smoothed bonus savings business in Mass Foundation Cluster that has death guarantees of premiums (net of fees) plus 4.25% pa investment return. Guaranteed annuity options Corporate Vested bonuses in respect of preretirement withprofits business Guaranteed annuity payments in respect of with-profit annuity business Retirement annuities sold prior to June 1997 contain guaranteed annuity options, whereby the policyholder has an option to exchange the full retirement proceeds for a minimum level of annuity income at maturity. There is a significant pre-retirement savings smoothed bonus portfolio. Vested bonuses affect the calculation of benefit payments when a member exits from the scheme as the face value is paid out. If, however, a scheme terminates, the lower of face and market value is paid out and the vested bonuses are not guaranteed. There is a significant with-profit annuity portfolio. The underlying pricing interest rate is guaranteed and as such the current level of annuity payments (including past declared bonuses) cannot be reduced. If, however, a scheme terminates, the lower of the liability value on the Financial Soundness Valuation basis and the underlying asset market value is paid out. The following disclosures are provided in terms of APN 110 issued by the Actuarial Society. Investment guarantee reserves have been calculated using an internal economic scenario generator (ESG) model that generates product specific economic scenarios. These scenarios comprise interest rates, inflation and fund returns and are generated using a Hull-White model for interest rates and inflation, and a Merton jump diffusion model for fund returns. The model is calibrated to South African derivative market data (where available and reliable), according to the company's specific calibration requirements. The calibration has been performed as at 31 December. 81

83 40. Insurance risk management (continued) The risk-free zero coupon yield curve has been derived from mid-swap spot rates at the calibration date. Term (years) Annualised zero-coupon yield 1 6.6% 2 7.0% 3 7.3% 4 7.5% 5 7.6% % % % % % The following derivative contract prices have been calculated using 8192 simulations of the internal ESG model at the calibration date. The table below provides the prices and implied volatilities of put options on the FTSE/JSE TOP40 index: Maturity (years) Strike Price Implied volatility 1 Spot 6.7% 21.5% times spot 1.8% 25.6% 1 Forward 7.6% 19.7% 5 Spot 10.5% 25.8% ^5 times spot 18.2% 25.5% 5 Forward 19.2% 25.3% 20 Spot 3.7% 29.2% ^20 times spot 15.1% 29.1% 20 Forward 26.9% 28.8% APN 110 also requires the disclosure of the following option prices: Description of derivative contract* 5-year put with a strike price equal to (1.04^5) of spot, on an underlying index constructed as 60% FTSE/JSE TOP40 and 40% ALBI, with rebalancing of the underlying index back to these weights taking place yearly. 20-year put option based on an interest rate with a strike equal to the present 5-year forward rate as at maturity of the put option (stripped from the zero coupon yield curve), which pays out if the 5-year interest rate at the time of maturity (in 20 years) is lower than this strike Calculated price (% of spot price) 12.84% 0.37% * Note that the FTSE/JSE TOP40 referred to in this section is a capital return index, whereas the ALBI is a total return index 82

84 41. Notes to the Statutory actuary's report Change in excess assets on published basis At end of the year At beginning of the year (39 411) (61 567) Change in excess assets (22 156) Analysis of change Operating profit before shareholder tax (excluding changes in the valuation basis) Dividend income Interest income Investment income on excess assets Gains and losses on excess assets Changes in valuation basis 356 (32) Non-operating items (finance cost on subordinated debt) (276) (268) Shareholder tax (2 536) (3 336) Policyholders' tax (459) (629) Profit for the financial year Other comprehensive income and equity Actuarial gains on defined benefit plans Revaluation of owner - occupied property Currency translation differences 4 60 Issue of share capital Other movements (48) - Dividends (3 510) (27 151) Change in excess assets (22 156) Reconciliation of policy liabilities from published to statutory basis Published ( ) ( ) Statutory (4 623) (22 155) Comprising: Investment contracts (4 589) (4 788) Reinsurance (34) (17 367) (4 623) (22 155) Reinsurance arrangements in respect of investment policies sold via the offshore branches were cancelled in. 83

85 41.3. Reconciliation of excess assets from published to statutory basis Published Statutory (51 868) (42 110) Difference (2 643) (2 699) Comprising Investment contracts (4 569) (4 788) Revenue recognition Deferred tax impacts of above items (2 643) (2 699) The investment contract adjustments relate to the increase in investment contract liabilities to hold market-related policies at the account balance. The revenue recognition adjustments are in respect of investment management contracts and arise from the spreading of incremental initial expenses and initial fees in excess of recurring fees Published valuation basis The published valuation of insurance contracts and investment contracts with discretionary participating features is performed using the FSV method, in accordance with SAP 104. This means that the assumptions used for valuing liabilities are based on realistic expectations of future experience, plus compulsory margins for prudence and further discretionary margins. The result of the valuation method and assumptions is such that profits are released appropriately over the term of each policy, to avoid premature recognition of profits that may give rise to losses in later years. Liabilities under investment contracts without discretionary participation are valued at fair value in accordance with IFRS 9. Assets Investment property and financial assets are valued on the bases set out in notes 1.5 and 1.9 respectively. Liabilities: Insurance contracts and investment contracts with a discretionary participation feature The major classes of business are valued as follows: For group savings policies, liabilities are based on account balances at the valuation date. Bonus stabilisation reserves are added. For retail policies where a portion of the premium is allocated to an accumulation account, liabilities are based on the account balances at the valuation date, less the present value of future charges not required for risk benefits and renewal expenses. - For market-related policies, the account balance is based on the market value of assets attributable to these policies. - For smoothed bonus policies, the account balance includes vested and non-vested bonuses declared to date, and where applicable provision for interim bonuses at current rates. Bonus stabilisation reserves (which may be positive or negative) are added to ensure consistency of the value of liabilities with the value of assets. For reversionary bonus with-profit policies, liabilities are determined by calculating the present value of projected future benefits and expenses less the present value of projected future premiums. Projected future benefits include bonuses accrued to date plus future bonuses at levels supported by the future investment return assumed. Bonus stabilisation reserves are added. 84

86 41.4 Published valuation basis (continued) For with-profit annuities, liabilities are determined by calculating the present value of projected future benefits and expenses. Projected future benefits include bonuses declared to date plus future bonuses at levels supported by the future investment return assumed. Bonus stabilisation reserves are added. For non-profit annuities, liabilities are determined by calculating the present value of projected future benefits and expenses, using applicable yield curves. Bonus stabilisation reserves are calculated by adding the investment return earned on assets backing smoothed bonus policies, less applicable charges and tax, and by deducting the cost of bonuses declared, including the cost of interim bonuses to the valuation date where applicable. The bonus stabilisation reserves for all classes of smoothed bonus business were better than -7.5% of corresponding liabilities at the valuation date. Policyholder reasonable benefit expectations are provided for by assuming that future bonuses would be declared at levels supported by the future investment return assumed, adjusted for the balance in the bonus stabilisation reserves over the next three years. The future gross investment return by major asset categories and expense inflation (excluding margins) assumed for South African assurance business are as follows: Fixed interest securities 8.0% 8.1% Cash 6.0% 6.1% Equities 11.7% 11.8% Properties 9.5% 9.6% Future expense inflation 5.0%* 5.1%* * 7.0% (: 7.1%) for Retail Affluent business administered on old platforms and 6.0% (: 6.1%) for Mass Foundation Cluster. 85

87 41.4 Published valuation basis (continued) In the calculation of liabilities, provision has been made for: The company's best-estimate of future experience, as described below; The compulsory margins as set out in SAP 104 and Board Notice 14 of 2010; Discretionary margins reflecting mainly the excess of capital charges over the compulsory investment margin of 0.25% for policies that are valued prospectively. These discretionary margins cause capital charges to be included in operating profits as they are charged and ensure that profits are released appropriately over the term of each policy; and Other discretionary margins, mainly held to cover: - mortality, lapse and investment return margins for Mass Foundation Cluster funeral policies, due to the additional risk associated with this business, and to ensure that profit is released appropriately over the term of the policies, - mortality margins on Retail Affluent old generation life policies and accidental death and disability supplementary benefits, to ensure that profit is released appropriately over the term of the policies, - interest rate margin on certain Retail Affluent life policies and Mass Foundation Cluster policies to allow for the uncertainty associated with volatile interest rates, - margins on certain Retail Affluent non-profit annuities, due to the inability to fully match assets to liabilities as a result of the limited availability of long-dated bonds, and to provide for longevity risk, - investment and expense margins in the pricing basis for Corporate Segment annuities, to defer the recognition of these margins, - interest margins on Corporate Segment PHI claims in payment due to the inability to fully match assets to liabilities as a result of the high rate of change in the portfolio (high volume of new claimants and terminations), - termination margins on Corporate Segment PHI claims in payment due to uncertainty about future termination experience, and - margins on the investment guarantee reserves to mitigate the sensitivity of the reserves calculated on a market- consistent basis to implied volatilities in particular. Some investment contracts are valued at units times price for statutory purposes, i.e an implicit discretionary margin is held equal to the value of the negative rand reserve. Liabilities include provisions to meet financial options and guarantees on a market-consistent basis, and make due allowance for potential lapses, paid-ups and surrenders, based on levels recently experienced. Mortality and disability rates assumed are consistent with the company's recent experience, or expected future experience if this would result in a higher liability. In particular, allowance has been made for the expected deterioration in assured lives experience due to AIDS, and for the expected improvement in annuitant mortality. The provision for expenses (before allowing for margins) starts at a level consistent with the company's recent experience and allows for an escalation thereafter. 86

88 41.4. Published valuation basis (continued) The company's recent experience in respect of products open to new business has been analysed in the following main experience investigations: Business unit Type of investigation Period of investigation Retail Affluent Annuitant mortality 2008 to 2012 Greenlight mortality 2010 to Greenlight morbidity 2010 to Greenlight persistency 2010 to Mass Foundation Mortality 2008 to Persistency 2007 to Corporate Segment Annuitant Mortality 2008 to 2012 PHI claims termination 2009 to Group Assurance mortality and disability experience Ongoing for the purpose of setting scheme rates All Expenses For all business units the expense assumptions are reviewed on an annual basis. In addition to these detailed experience investigations, valuation assumptions for all material products are actively reviewed. The analysis of profit provides a measure of the aggregate experience in. During this valuation period, actual experience was in aggregate more favourable than the valuation assumptions, excluding special project expenditure. Liabilities: Investment contracts without discretionary participation features For both retail and group savings policies, liabilities for investment contracts without a discretionary participating feature are based on account balances at the valuation date. In respect of investment contracts that provide investment management services, for example market-related investment contracts, a deferred acquisition cost (DAC) asset is held, which defers incremental acquisition expenses over the expected term of the policy, and a deferred revenue liability (DRL) is held, which defers excess initial fees over the expected term of the policy. For structured products, liabilities are calculated based on the market value of matching assets, together with an allowance for future expenses and margins. For non-profit term certain annuities, liabilities are determined by calculating the present value of projected future benefits and expenses, using applicable yield curves. Liabilities include the cost of any investment guarantees for products that are classified as investment contracts. These have been calculated on a market-consistent basis and a discretionary margin has been added to the calculated reserve. Sample derivative contract prices derived from the calculation are provided in note 40. Various actuarial assumption changes have been made which resulted in a net reduction in the value of liabilities of R356 million (: R32 million increase in liabilities). This is mainly the result of the positive mortality assumption changes, mostly offset by a management action to share some of the mortality assumption change in Mass Foundation Cluster with policyholders and by a strengthening of lapse assumptions. The assumption changes exclude the impact on new business sold in, as this is valued on the new basis. 87

89 42. Events after the reporting period On 12 January 2015 the company agreed to dispose of the remaining portion of the Menlyn Shopping Centre in South Africa for R3 200 million, subsequent to the completion of agreed upon improvements of the centre. Refer to note 13 for more information. On 23 January 2015 the company purchased a 23.3% stake in UAP Holdings Ltd, an East and Central African financial services company, for a total consideration of R1 139 million (KES 8.88 billion). On 26 January Old Mutual Holdings Ltd, a fellow subsidiary based in Kenya, confirmed that it will be acquiring an additional 37.3% of UAP's shareholding, subject to regulatory approval. Following the successful completion of a bond auction, which took place on 16 March 2015, the company has issued a mixture of floating rate and fixed instruments with several maturities through its existing local South African programme. Accordingly, the JSE Limited has granted a listing to the company on the South African Interest Rate Market with effect from 19 March 2015 under its Unsecured Subordinated Callable Note Programme dated 4 September. The total nominal value of instruments issued was R2 061 million. 43. General company information 43.1 Review of activities The principal activity of the company is the transaction of all classes of life assurance, savings and retirement funding business. The company underwrites life insurance risks associated with death and disability. It also issues a diversified portfolio of investment contracts to provide its customers with asset management solutions for their savings and retirement needs Holding company The company's holding company is Old Mutual Emerging Markets Ltd incorporated in South Africa Ultimate holding company The company's ultimate holding company is Old Mutual plc incorporated in the United Kingdom and listed on the London, Johannesburg, Malawi, Namibia and Zimbabwe stock exchanges Company secretary Ms E M Kirsten is the company secretary. Registered office Postal address Mutualpark Jan Smuts Drive Pinelands 7405 South Africa PO Box 66 Cape Town

90 44. Statutory capital adequacy requirements The CAR has been calculated in accordance with SAP 104 issued by the Actuarial Society of South Africa and Board Notice 14 of 2010 issued by the FSB. These provide a buffer against future experience being worse than assumed in the statutory valuation method (as calculated in accordance with SAP104 and Board Notice 14 of 2010). The CAR is the greater of two calculations, viz. the Ordinary Capital Adequacy Requirement (OCAR*) and the Termination Capital Adequacy Requirement (TCAR*), which are calculated as follows: The TCAR ensures that a long-term insurer is in a position to survive a very selective run-on-the-bank scenario, and requires that the insurer holds capital equal to the amount by which excess assets would drop on the immediate termination (lapse or surrender) of all policies with a statutory liability less than the benefit amount payable on immediate termination. The OCAR formula comprises a factor-based approach that isolates each major risk category and establishes what capital needs to be held in respect of that risk. The results are summed with an adjustment ( summing and squaring approach) to allow for diversification between the risks. The OCAR also allows for the effect of a fall in the fair value of the assets backing it as well as any credit risk associated with these assets (this is referred to as the grossing up factor ). At 31 December, the TCAR exceeded the OCAR, and thus the capital adequacy requirements have been based on the TCAR. (* As defined by SAP 104) The investment resilience is the single most significant component of the company's OCAR. The calculation of this component is based on the adverse investment scenario specified in SAP 104 occurring at the valuation date, offset by the management actions assumed to be taken by the company to reduce policy liabilities under these circumstances. The investment scenario includes assuming a 30% decline in equity values, a 20% decline in foreign currency denominated assets other than equities, a 15% decline in property values and a 25% relative increase or decrease in fixed-interest yields to maturity and in real yields to maturity on inflation-linked bonds. The management action that is assumed to be taken is the minimum that the company would be willing to take under such conditions, and in assuming this action, the company does not limit itself to only taking this action under such circumstances. The board has approved the management actions that would be taken in adverse investment conditions. These include reducing surrender values in accordance with underlying asset values, reducing interim bonuses (if necessary to zero), declaring low or if necessary zero bonuses, and if the circumstances warrant it, removing part or all of nonvested balances. The nature and extent of the action that would be taken will depend on the severity of the decline in asset values and the circumstances at that time. 89

91 44. Statutory capital adequacy requirements (continued) The offsetting management actions that are assumed in calculating the OCAR vary depending on circumstances at the valuation date. The following management actions have been assumed in calculating the OCAR as at 31 December, if asset values had declined as specified as at 31 December, and had not subsequently recovered (31 December management actions in brackets): Future bonus rates would have been reduced by 4.2% (2.8%) per year in each of the following three years for Absolute Smoothed Growth and Absolute Stable Growth products. Future bonus rates would have been reduced by 1.9% (2.8%) per year in each of the following three years for Retail Affluent smoothed bonus products. Future bonus rates would have been reduced by 3.0% (2.8%) per year in each of the following three years for Mass Foundation Cluster products. Future bonus rates would have been reduced by 1.6% (0.7%) per year in each of the following three years for products which only have vested bonuses (excluding with-profit annuities). Future bonus rates would have been reduced by 0.4% (0.4%) per year in each of the following three years for with-profit annuities (excluding Platinum 1999 and Platinum 2003). Future bonus rates would have been reduced by 0.1% (0.6%) per year in each of the following three years for Platinum 1999 with-profit annuities. Future bonus rates would have been reduced by 1.5% (2.2%) per year in each of the following three years for Platinum 2003 with-profit annuities. Future bonus rates would have been reduced by 2.1% (2.0%) per year in each of the following three years for all other Corporate Segment pre-retirement smoothed bonus products (mainly Guaranteed Fund and Genesis). The management actions assumed above have been approved by specific resolution by the board of directors. For the purpose of grossing up the intermediate ordinary capital adequacy requirements (IOCAR*) to determine the OCAR, it has been assumed that assets backing the capital adequacy requirements are invested 12.5% in local equities, and 87.5% in local cash (December : 12.5% local equities and 87.5% local cash). 90

92 Employment equity report Employment equity report The table below sets out the staff profile of the Old Mutual Group in South Africa, excluding Nedbank and Mutual and Federal, across the different race groups (African, Coloured, Indian, and White) as at 31 August. The employment equity data formed part of the annual declaration to the Department of Labour and in compliance with Section 21 of the Employment Equity Act 55 of Foreign Male Female national Occupational levels A C I W A C I W M F Total Top management Senior management Professionally qualified and experienced specialists and mid-management Skilled technical and academically qualified workers, junior management, supervisors, foremen, and superintendents Semi-skilled and discretionary decision making Unskilled and defined decision making Total permanent Temporary employees Grand total The following table indicates the total number of employees with disabilities only at the various occupational levels: Male Female Foreign national Occupational levels A C I W A C I W M F Total Top management Senior management Professionally qualified and experienced specialists and mid-management Skilled technical and academically qualified workers, junior management, supervisors, foremen, and superintendents Semi-skilled and discretionary decision making Unskilled and defined decision making Total permanent Temporary employees Grand total Note: Racial categories: A - African; C - Coloureds; I - Indians; W - Whites; Gender categories: M - Male; F - Females Further details, together with the report, can be found in the Old Mutual Sustainability report. 91